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November 14, 2005

Debating the Social Benefit of Home Ownership

Following our rant earlier this month, we were interested to see the article in the Sunday Times business section weighing in on the topic of the deductibility of mortgage interest:

It has long been an article of faith among policymakers that homeownership produces a big beneficial spillover to society at large. In the 1920's, Herbert Hoover said a family that owned a home had "a more wholesome, healthful and happy atmosphere in which to bring up children." Franklin Delano Roosevelt said that "a nation of homeowners is unconquerable." The government's use of tax incentives to encourage homeownership has a cost, however. The mortgage interest deduction and other subsidies will cost the government roughly $716 billion in lost taxes over the next five years, the president's tax panel said. And the subsidy distorts incentives to invest, pulling money into housing from other parts of the economy. So, are Americans getting value for their money?

While there seems to be some agreement that home ownership is desirable, there are those that feel that we may be oversubsidizing it and that the subsidy may be having an adverse effect on inner cities where it could be widening the gap between rich and poor.
Buy a Home and Drag Society Down [NY Times]




Posted by Brownstoner at 8:57 AM | Comments (27)
Categories: Discussion

Comments

Brownstoner, the proposition that the mortgage interest deduction is a prime cause of wealth disparity in inner cities is questionable from the outset.

However, assuming that such a dubious proposition is correct, should we assume that the increased tax revenues that would result from the abolition of such a deduction (primarily federal tax revenues) would somehow be used to alleviate the gap between rich and poor in inner cities? I doubt it would be, especially with this federal administration. If individuals are less incentivized (if that is a word) to invest in houseing, they will potentially invest in other markets, such as the stock and bond markets. I doubt individuals would invest in inner city improvement projects in lieu of housing or stocks/bonds.

With respect to the inner city poverty issue, that leaves use with the government again, and the hope that they would use the increased tax revenue from an abolition of the mortgage interest deduction to somehow alleviate inner city poverty. Highly doubtful.

How would increased investment in the stock market in lieu of housing help poor inner city communities? Again unlikely, unless you subscribe to a trickle down theory of economics that a strong investment market would lead to more employment and opportunities for the poor in the inner cities (this didn't work during the Reagan/Bush I administration, and does not seem to be working now during Bush II for the inner city poor).

While there may be other valid reasons for abolishing, or reducing, the mortgage interest rate deduction, in my opinion, the proposition that it would lead to less wealth disparity overall and a better economic future for the inner city poor is not a realistic or viable rationale.

Posted by: Anonymous at November 14, 2005 9:31 AM

I think there is a lot of merrit to the argument in that article. That's the first time in the times, but that's been a complaint from the flat-tax types and most economists for a while. Ultimately, this is just encouraging a lot of investment in housing.

If we had a level playing field, people would be more likey to invest in other things, their own business, other markets, etc. This money then would (at least in most commonly accepted theory) go to where it is likely to be the most productive.

And, despite the prev poster's portestations to the contrary, all indicators show that increased economic growth benefits all. You can certainly find some people who get more benefit than others, but the numbers do bear out that all ships have gotten a lift. Also strange that the prev poster excludes Clinton from his bashing. Economic policies didn't change altogether that much.

Posted by: JoshK at November 14, 2005 10:13 AM

I'm the previous poster. Clinton did not enact enormous tax cuts on the wealthy (which includes me from a tax perspective by the way), therefore the revenue issue was less of a problem than it is now. Large income tax cuts, fighting two wars, uncontolled spending, a short sighted energy policy... I digress.

And I do think that a strong overall economy does benefit all generally, some more than others. I just doubt how effective trickle down theories truly are in alleviating wealth disparity in large cities. I'm not some bleeding heart liberal, at the same time I'm not a laissez-faire type either. This blog is probably not the best forum for these complicated issues...

Posted by: Anonymous at November 14, 2005 10:33 AM

Don't forget that JoshK (=> http://www.joshyablon.com/wordpress/) needs to carry water for his higher-up Republicans buddies by evangelizing Brooklyn dwellers from his HQ in the Upper-West side......

PS (http://www.joshyablon.com/wordpress/?p=19): I like him paying for bus trip to Wal-Mart, so that Wal-Mart deprived NY consumers can experience the greatness of WM.......

Posted by: Anonymous at November 14, 2005 10:51 AM

If I recal, Bush 1 reversed a small portion of Reagan's tax cuts. Under Clinton, some changes took place, but they were minor. As far as things like welfare reform, he was much more a GOP pres than Bush 2. He also shrank the gvt slightly as a % of GDP (or workers per capita - or both - I forgot). Even under Bush 2, there has been little decline in gvt revs, the deficit has been related to increased spending.

So to exclude Clinton sounds like quite a bit of partisanship to me.

But I think you are not looking at this right in the first place: " I just doubt how effective trickle down theories truly are in alleviating wealth disparity in large cities."

If the issue is wealth disparity, that's one thing. If you are upset with how many chips Bill Gates has, then that one thing.

If the issue is standard of living, that's another. The standard of living has risen dramatically. If some people have more wealth than others, that is a separate issue - and I'm not sure why it matters if you have more than me as long as that has helped me live better than I have before.

Posted by: JoshK at November 14, 2005 10:55 AM

Maybe I'm not clear before. Every administration can (try) to set the tax policy that they would like. Clinton didn't veer very far from the tax schedule he inherited.

Just by example, if the previous Chineese government restricts access to the internet and then the following government keeps those restrictions in place, it would be fair to say that the second government is also repressive. They don't have to find something new to restrict - consistency with the past policy is enough.

Posted by: JoshK at November 14, 2005 11:01 AM

I doubt traditionally a big percentage of people viewed their home as investment vehiclein the manner of stocks or owning own business. Perhaps an investment in their own economic/emotional security and more control over their lives and future. (meaning someone not telling you to move out next year or what color to you can paint living room).

Posted by: Anonymous at November 14, 2005 11:01 AM

I hate quotes like this - "The mortgage interest deduction and other subsidies will COST (emphasis added) the government roughly $716 billion in lost taxes over the next five years..."

The mortgage interest deduction does not COST the government a single nickel. It allows people to keep more of the money they earn. It's not as if it was the government's money to begin with.

I agree that the deduction is probably not effective in promoting home ownership, is probably not good tax policy and provides a greater benefit to the wealthy. I would be happy if the government did away with it and lowered my income tax rate. Then I would make investment decisions without the tax impact externality driving my decisions.

Posted by: BigBubba at November 14, 2005 11:03 AM

If mortgage deductiblity was taken out of the tax code, the most likely outcome is that home prices will fall since mortgage deductiblity is currently priced into todays home prices. Wouldn't the downward adjustment in prices make housing more affordable for all and benefit the greater good? This is about leveling the playing field not re-distribution of wealth or trickle economics. From the article, "the mortgage interest deduction encourages richer families to buy bigger places in the suburbs and leave the more cramped cities to the poor." Words like encourage and incentives mask the true nature of what's going on. Mortgage deductibilty is not an 'incentive' or 'encourgament', it is WELFARE that costs the gov't almost $150B a year. Thanks to gov't handouts, the richer families are able to buy bigger and better places.

Posted by: Anonymous at November 14, 2005 11:12 AM

Bubba, you're mudding the water with the "It allows people to keep more of the money they earn" and "It's not as if it was the government's money to begin with' arguments. It is the gov'ts money to begin with. Homeowners are using the deduction to offset money that they owe the gov't in Income Taxes. This is lost revenue to the govt. I would argue the lost revenue does COST the govt something. If this goes through, would you then call it a mortgage tax?

Posted by: Anonymous at November 14, 2005 11:25 AM

I think you could go in a circular agrument talking about if this is gvt welfare or just the gvt showing some restraint. The gvt could certainly go revenue neutral and lower income taxes while cutting this deduction. And they could wind up doing that so that it nets out relatively evenly for most people.

But, BigBubba has the right point there at the end. We get really strange results when the tax impact is a major driver of investment decisions. People would make choices more closely aligned with real world costs and opportunities if they didn't have the tax incentives to do otherwise.

For example, a friend of mine lives on a property out in NJ that is large enough to be called a farm, and he uses it to get every farmer's tax credit and benefit he can. He has some sorts of farm animals because the net benefit is worth it - not because he is a farmer.

Posted by: JoshK at November 14, 2005 11:36 AM

Less well of families can take advantage of the deduction too if they buy a house.

Posted by: Anonymous at November 14, 2005 11:43 AM

If you're wealthy, the mortgage deduction means very little because the govt phases it out and you get hit with things like the AMT. Bubba is correct. The deduction doesn't "cost" the govt anything because the govt does not earn money and spend it. All that they do is take money from people who earn it. If they take less, then that is not a "cost."

As for those showing a strong bias against those earning higher incomes, by what right do you stake a claim to anybody's income? Please be specific. For example, you may claim that the "rich" should help the "poor." But that is not enough. That just tells us your desire. What I want to know is by what RIGHT do you impose your desires on others? By what right do you initiate force and violence against innocent people? (yes, force and violence because if you don't pay your taxes, they will come after you and ultimately use force to either make you pay or they will throw you in jail).

Posted by: Anonymous at November 14, 2005 12:52 PM

Innocent of what? The government is the one that issues the money and guarantees it as legal tender and enforces 'contracts' that you get paid in the first place or you pay for item you purchase. So absolutely the government has right to claim some of this money to operate.
And 'rights' to tax are a legal matter and that is well-estblished in court of law so forgetabout your silly anti-tax nonsense rhetoric.

Posted by: Anonymous at November 14, 2005 3:02 PM

Wow. These discussons really deteriorate quickly.

I would recommend a recent Slate piece by Jason Furman, a former member of the Kerry campaign economic policy team.

http://www.slate.com/id/2130017/

He supports the 15% capped mortgage interest credit on several grounds. He discusses the tepid empirical support for spillover effects of homeownership (technically, positive externalities associated with home purchases). Furthermore, he argues that very few consumers will choose not to buy homes because of the tax change. Rather, people will tend to buy smaller homes. Sadly for the Brownstoner, this means more demand for condos and less for brownstones.

Of course, amt aside, this would increase equality. Many lower income homeowners (Furman estimates 20 million) will pay lower taxes after the credit while higher income homeowners will pay higher taxes.

Unfortunately for recent brownstone purchasers the change would lead to sharply higher taxes. Renters, on the other hand might benefit relative to owners because the interest deductions for landlords would not change.

Furman estimates a modest effect on prices in the market as a whole with the biggest impact predictably ocurring at the high end (New York, LA, SF).

Overall, I personally think buying a little less house is positive (I have lived in a porous brownstone on and off for 25 years). Many of us would never drive an SUV, yet we dream of ever bigger homes, with walls of windows, soaring ceilings, "great" rooms, jacuzzis, ensuite bathrooms and fireplaces everywhere. Hardly a recipe for sustainability.

Posted by: bkborn at November 14, 2005 3:03 PM

When looking at this tax, Ithink we shoudl break it down into two "zones". One, most of the US, where housing pretty much costs what it costs to build it. The other is places like NYC and CA where restrictive zoning prevent building more housing and an artificial cap is placed on creating more.

In NYC, the actual cost of construction for a high-rise (from Crains, early this year) was put at $360/sq ft. I don't know if they had any caveats on this, but even +/-50%, it still doesn't approach the end-cost to buy ($1K/sq ft+).

One idea floating around is that in these high-regulation areas, reducing the tax benefits would just lower the purchase prices. Of course, your mortage costs more now b/c it's not deductable, but the purchase price has gone down.

As far as the last post, why is it positive to have less house? That seems pretty subjective to me. Eating less is certainly better for most people, but I'm not sure I understand how big homes are bad. Assuming people aren't artificially choosing "more" home b/c of taxes, why is it bad if one persona wants to spend all of their money on a house and the next person wants to spend all of their money on vacations?

Posted by: JoshK at November 14, 2005 3:35 PM

Wasn't it JoshK, who recently mentioned something of non-productive assests (big homes) vs productive assets (businesses,......) in a different thread?

Posted by: Anonymous at November 14, 2005 3:52 PM

You miss the context. If you're talking about investments, it always makes more sense to invest your money, rather then spending it. In the rent vs/buy scenario, you have to look at the best payout - you may be able to get more home and higher savings by investing in other assets besides homes.

But, why is spending on a house worse than other sorts of spending? If you like nice vacations, a boat, endless spa appointments, or maybe you collect stamps. I'm questioning making a judgement of "better" spending.

Posted by: JoshK at November 14, 2005 3:57 PM

I certainly agree that consumers should be free to choose their house size. If they prefer a big house over a big mac they should have that choice.

I question whether tax policy should make bigger houses cheap relative to bigger hamburgers or bikes or shares of Google for that matter.

While there is significant debate over whether real estate assets are overvalued, there is almost universal agreement that we as an economy are consuming more and more housing than we have in the past. There has been growth both in absolute terms and relative to wages and consumption of other goods. Houses are getting bigger and more elaborate.

Home ownership rates have risen even as the tax treatment of mortgage interest has remained unchanged for decades. There just doesn't seem to be a persuasive policy rationale for the current tax-favored treatment of housing purchases.

Posted by: bkborn at November 14, 2005 4:40 PM

bkborn - you sayin what I'm sayin.

Posted by: JoshK at November 14, 2005 5:28 PM

JoshK: I am sort of sayin what you sayin.

If the market likes more housing and buys more housing great. If the government rewards people for buying more housing, it creates distortions, inefficiency and a currently regressive tax treatment. All of those are bad things in of themselves.

However, I also think that these larger houses, whether brownstones or exurban McMansions, generate a lot of land and energy use pressures regardless of tax treatment.

A couple of years ago Hummers, by virtue of their massive weight, were eligible for an automatic business tax deduction and me and my brownstone dwelling neighbors all wrang our hands in outrage. How could a country on the brink of war and looming energy instability, ecourage consumers to buy these vehicles?

Meanwhile tax policy, fiscal policy and, ok, consumer tastes fueled a massive housing boom that led to households using bigger, more energy intensive structures.

Posted by: bkborn at November 14, 2005 6:28 PM

Just as far as energy use in homes, my understanding is that homes have a lot of potential for being very energy efficient. In a simple sense, a ceiling fan can be used a lot more efficiently than an air conditioner for often an adequate result. In a more complicated sense, buildings like the new Reuters building have massive energy saving features. On the other extreme, buildings like that big tin can (Civic Ctr?) in downtown Chicago are energy pigs.

IMHO, we can have some very nice and very large dwellings without much impact on anything, besides offending people who don't like big new buildings.

The thing with the hummers was silly too, I know a lot of people who bought Navigators b/c of the deductions.

I used to think the flat tax was crazy, but now I'm not so sure. Maybe a progressively graded flat tax, but I think these deductions have gotten out of hand. I would bet that if you tried to come up with a # showing the lost GDP b/c of wasteful deduction management, it would be a staggering #.

Posted by: JoshK at November 14, 2005 9:47 PM

I may not be typical, but the effects of eliminiating/capping the mortgage deduction might make me more likely to buy more house, not less.

I own a townhouse now. This is a very simplified version of my real-world numbers, but suppose my house were worth $1M, I have a $300K mortgage on it, and I'm interested in a house that's worth $1.5M. If I sold and bought today, I'd have $700K proceeds to put down (leaving out closing costs for simplicity's sake) and would need a $800K mortgage on the new house.

Say the tax changes bring down prices 25% acrosss the board. Now my house is worth $750K and the house I want to buy, $1.125M. With $450K proceeds, I'd now have a $675K mortgage after trading up. Granted, that mortgage would be less tax-advantaged, but I don't think the difference would be enough to make me stay put.

Obviously the calculation depends on a lot of things, such as one's income and tax bracket, and whether prices really do decline across the board. But however well this hypothetical works, the point is that if higher-priced homes really do decline, I'm not sure that's an incentive to buy less house, particularly if you already have less equity. Sure, it may make better sense to put the money elsewhere as an investment, but I'm not buying my house as an investment.

Posted by: linusvanpelt at November 15, 2005 8:53 AM

More expensive homes would not get hit as hard as medium-priced home for the simple reasons that: 1) mortgage deduction is already capped at $1 mln (many higher priced homes change hands for all-cash deals, unlike medium-priced homes that almost always have a mortgage) and 2) the govt already reduces the mortgage deduction for very high income earners (all deductions are phased out the higher in income you go).

Posted by: Anonymous at November 15, 2005 9:14 AM

It's amazing how the collectivist mentality permeates many responses. There are so many aspiring central planners on this board. You all have the supposed answers that will solve "our" problems. Oh, well.

Posted by: Anonymous at November 15, 2005 9:16 AM

Is there a Misean/Rothbardian/Mutualist/Agorist hiding behind an anonymous moniker? Or just a plain 'ole Hayekian?

Posted by: iceberg at November 15, 2005 9:26 AM

Another thing that no one thinks about is what if you buy a place to stay there for the long term and expect inflation to compensate for the loss in deductibility of your payment? If there's no inflation, then you will loose that deduction and are probably not prepared for that.

Posted by: JoshK at November 15, 2005 11:00 AM

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