Get Homeowners Off Welfare
By Justin Fox Monday, Oct. 12, 2009

http://www.time.com/time/magazine/ar...927288,00.html

For a nation whose citizens pride themselves on self-reliance, the
U.S. doles out an awful lot of welfare. Corporations get it. Farmers
get it. Even poor people get it. But no other interest group makes out
quite the way homeowners do. They — or we, I should say, for I'm a
homeowner too — are at the receiving end of a truly staggering array
of subsidies and tax breaks. Putting an exact price tag on all of them
is impossible, but the value is clearly in the hundreds of billions of
dollars a year.

Even with all this aid, though, U.S. homeowners haven't been doing so
well. The value of their real estate holdings has fallen by $4
trillion since 2006, according to the Federal Reserve. Millions of
people have been booted from their dwellings over the past couple of
years because they couldn't make their mortgage payments. Millions
more foreclosures are on the way. The housing market, despite some
hopeful signs over the summer, remains a terrible mess. (See high-end
homes that won't sell.)

Washington's reading seems to be that we're not subsidizing housing
enough. Congress, the Bush and Obama administrations and the Fed have
been piling on new aid. For now, they may be correct to do so. With
the banking system still shaky, further big declines in house prices
could bring disaster. Slowing a price collapse is a reasonable aim of
government policy. But as we dig out of this mess, we ought to ask
whether the vast infrastructure of government support for
homeownership that has been built up since the 1930s is really such a
wise policy.

How do we subsidize homeownership? Let me count the ways. First, more
than 80% of the mortgage loans made in the U.S. so far this year have
been bought by the government-sponsored entities (GSEs) Fannie Mae,
Freddie Mac and Ginnie Mae. That keeps the interest rates on those GSE-
backed mortgages substantially lower than on mortgages that can be
sold only on private markets, because taxpayers are on the hook for
defaults on the former. That risk, long hypothetical, became reality
as we got stuck with a $291 billion rescue bill for Fannie and Freddie
in the fiscal year that ended in September. Meanwhile, the Federal
Reserve is doing its part to artificially lower interest rates by
buying $1.25 trillion of Fannie, Freddie and Ginnie mortgage
securities this year and next. (See 25 people to blame for the
financial crisis.)

Then come the tax breaks. The stimulus bill approved in February
included an $8,000 tax credit for first-time home buyers — at a cost
of about $14 billion for the year. That's set to expire, but there's
talk in Congress of extending or even expanding it. A much bigger deal
is the income tax deduction for mortgage interest paid — which has
been with us as long as there's been an income tax — at a cost
estimated by the Congressional Joint Committee on Taxation at $80
billion this year. The deduction for property taxes costs an
additional $16 billion, as does the tax break on capital gains on the
sale of owner-occupied houses.

There are many other, smaller subsidies aimed at low-income home
buyers. But the bulk of the tax benefits flow to the upper end of the
income spectrum. And to the coasts as well: a study by two Wharton
School economists found that homeowners in high-priced regions in
California and on the Eastern seaboard suck up most of the gains.

Housing subsidies have side effects too. For one thing, they push us
to buy rather than rent. There's a positive side to this, as
homeowners tend to take better care of their property and their
neighborhood than renters do. But there's a negative one too,
particularly in times of economic upheaval like this, as homeownership
becomes an economic ball and chain that keeps workers from moving to
areas where jobs are more plentiful. Subsidies also tempt us to buy
more house than we would otherwise, a wasteful use of capital — not to
mention of the energy it takes to heat and cool large houses. Finally,
subsidizing house purchases drives up prices. That can be a boon to
some sellers but not to renters or first-time buyers.

Rising prices are always good news, though, for real estate agents,
mortgage lenders and homebuilders. The higher prices go, the bigger
their cut of the action. These groups are powers in Washington. The
National Association of Realtors gave more money than any other group
to candidates in the last elections ($4 million), according to the
Center for Responsive Politics, and its 1.1 million members can do a
lot of lobbying. Hence the subsidies for homeownership that never go
away. In 1961 departing President Dwight Eisenhower warned of "the
acquisition of unwarranted influence" by what he dubbed the military-
industrial complex. Maybe it's time to call out the real estate —
industrial complex.

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