Shostack + Friends Blog Archive


Unmeddling Housing

For a great many years, US taxpayers have been able to deduct interest paid on a home mortgage from their taxes. That made owning property cost roughly 20% less than it otherwise would have (estimating a 25% tax rate on interest on 80% of a property). So everyone could afford 20% “more” house, which meant that property values inflated until things were in balance again.

It was a good deal for those who were in at the start. But we should also ask, who lost out? First, anyone renting who couldn’t take the deduction. Second, anyone who assumed that this state of affairs would go on forever. Because this week, the chair of the FDIC called for a re-examination of that policy.

Now, this week, Goldman Sachs predicted a 20% drop in Seattle home prices over the next two years, so as a renter, I get to feel a little schadenfreude. But more important, I think, is the chaos of unwinding 50 years of distortion in the housing market.

A great many people have taken the rise in home prices as a bankable truism. Conflating the rise in prices has been a massive increase in the size of houses and lots, underwritten by cheap oil and large highways, but I’m going to mostly set that aside, and focus on the impact of social policy.

Homeownership has a number of downsides. It locks up a tremendous amount of capital in an illiquid investment. It conflates investment and emotional concepts of home. It makes it hard to move when you need a new job.

Now, a government policy to encourage homeownership (uber alles) encourages homeownership. The trouble is, it does so in an unnatural way, and in a way which it now seems appears unsustainable to our bank regulators. That it’s unnatural and unsustainable was always obvious. It’s inherent in the fact that it’s being encouraged. At the margin, there are either people who buy because it’s encouraged, or the policy is an utter failure. So there are people who, without such a policy, would not be homeowners. And homes cost more than they otherwise would.

But after 50 years of meddling in the market, reducing the support for housing is going to be exceptionally complex and chaotic. And the chaos isn’t going to be evenly distributed. It’s going to be a matter of long, complex laws whose outcomes are carefully and secretly influenced. Groups who aren’t photogenic or sympathetic will lose out. (I’m thinking “DINKs” in gentrified urban areas.) Groups who aren’t already well-organized with good lobbyists will lose out. (See previous parenthetical.) Those who believed that the government housing subsidy would go on forever will lose.

Most of all, those of us who lived within our means are going to lose out as the taxpayer “helps cushion” the “unpredictable” changes.

The worst part is, government never needed to get involved.

[This was written in June, I forgot to hit post, so the dates are a little off.]

4 comments on "Unmeddling Housing"

  • Doug says:

    Although I agree that government intervention distorts the market in some particularly bad ways, I think your argument is flawed. (1) Rents are set by supply and demand rather than the underlying cost of the property, (2) The interest deduction on a rental properly goes to the landlord, and (3) the recent drop in value suffered by the landlord also does not change your rent.

  • John Kelsey says:

    I think unintended consequences of our tax support for both home mortgages and employer-provided insurance, as well as our policy of high tuitions even at state colleges with student loans, all go in the same direction: They convince people to become much less free, in practice.

    If losing your job means losing healthcare for your diabetic kid, you’re noticeably less free. (I’m not claiming that Obamacare or single payer or whatever is a general solution here, just that the current situation demonstrably decreases freedom in important ways.)

    If you can’t take a new job in another town without either selling your home (on which you now owe $50K over current market prices), you’re kind-of anchored in place–it’s much harder to change jobs, even when you have very good reasons to want to do that.

    If you owe a ton of money on student loans, similarly, you have fewer good choices–alongside thinking about how to find a job that makes sense for you and pays the bills, you need to be thinking about how to make those loan payments.

    None of this is government-imposed loss of freedom. It’s basically government-subsidized or -encouraged loss of freedom.

  • NPR’s planet money just did a story on Fannie Mae and its distortion of the housing market, which sounds even bigger than the interest deduction:

Comments are closed.