Economics: A Home of One's Own

For a very long article on the history and future of home ownership public policy, see A Home of One's Own by Vincent J. Cannato, Spring, 2010.

Looking back, it is easy to see how the policies of the Clinton and Bush administrations contributed to the inflation and the bursting of the housing bubble. But these problems were much more than 15 years in the making. Clinton and Bush were simply following out the logical trajectory of the ideology of home ownership, advancing the policies of their predecessors. Like many others before them, they assumed with little evidence that home ownership would be a panacea. They believed that government backing of the mortgage market would reduce costs and increase liquidity. And they believed that the dangers of the riskiest mortgages could be adequately spread out across the market and measured by investors. They were wrong, of course — and now all of us are paying the price.

Will Washington change its attitude ... and pull back from its infatuation with boosting home-ownership rates? The early indications are not heartening. The new $8,000 tax credit for first-time home buyers is a return to earlier efforts to try to re-inflate the housing market by (artificially) stimulating demand. Politicians still seem to think that we can recover from the recent market crash simply by pumping air into the next bubble.

Fannie Mae and Freddie Mac should not simply return to their pre-crisis incarnations. The two companies were taken over by the federal government in September 2008, and the Treasury confirmed (as the mortgage market had always assumed) that it would back the mortgages they held or guaranteed — which by the end of 2008 amounted to some $1.6 trillion of high-risk debt. Clearly, Fannie and Freddie's status as privately owned, for-profit companies that nonetheless possessed implicit federal backing was fraught with disaster. Most of the financial benefits created by these government-sponsored enterprises went to the officers of the companies instead of borrowers, while all of the risks they took on were ultimately borne by taxpayers.

... the home-mortgage deduction — beloved by the public, detested by economists — should gradually be curtailed. While the deduction seems not to affect home-ownership rates a great deal, it does have the effect of increasing home prices. And through the deduction, the government not only directly subsidizes home owners at the expense of renters, but also subsidizes mostly upper-income home owners. Only half of home owners take advantage of the deduction by itemizing their tax returns, and nearly half of the benefits go to people making more than $100,000 a year. In 2006, the cost of the deduction to the Treasury — meaning the rest of the taxpaying public — was $76 billion.