Houses and Homes

There is nothing like being both a buyer and a seller in the current housing market to focus one’s attention on the avalanche of housing news available these days (current status: national market down; local market down; my micro market stable). Within this informational bounty, however, I have found few news articles as thought provoking as this NY Times piece.

The article explores how the new no-money down, interest only, adjustable rate loans encouraged a subtle but distinct change in how we think about the homes we live in; a shift from buying homes as homes to buying houses as investments.

For decades, Americans bought homes. Doing so signaled the buyer’s middle class status and commitment to his or her community. The housing market was relatively stable, so most long-term owners would eventually see a tidy profit on their purchases. But their homes were first and foremost places to live. In the midst of the recent housing bubble, that changed. We still, of course, lived in our houses, but rapidly escalating prices and the lack of other savings encouraged owners to start viewing their houses first and foremost as investment vehicles.

This shift is obvious to anyone who, like me, is an HGTV addict. Rarely do you see an HGTV host praise a homeowner’s decision to paint her house purple because it is her daughter’s favorite color. On a recent episode, one woman tried to explain to the host that while she and her husband had probably “overinvested” in their beautiful backyard, they valued outdoor living and thought the decision was worth it – even if they did not recoup the money on the resale. The host looked at her as if she were speaking Klingon.

This shift – from houses as homes to houses as investments – raises interesting public policy questions. Should the government subsidize (through the mortgage tax deduction) this type of investment? The mortgage tax deduction for owner-occupied residences now costs $430.2 billion and is projected to be the fourth largest federal tax expenditure in 2007-2011. Subsidizing home ownership this way may have been a reasonable public policy choice when such ownership brought with it the type of investment in and care for a community that increased property values and quality of life for entire neighborhoods, but does it makes sense in light of an investment mentality that may be encouraging (or forcing) people to “walk away” from purchase choices gone bad?

And what of the social phenomena that promotes home ownership as an essential part of the American dream? If achieving home ownership requires the type of high-risk loans that contributed to our recently burst bubble, is it time to start rethinking our national mantra extolling the virtues of ownership for all? If so, how can we change our public dialogue so home ownership is no longer viewed as an essential element of a middle-class life? The current housing crisis offers us an opportunity to think about these types of underlying issues.

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6 Responses

  1. “The mortgage tax deduction for owner-occupied residences now costs $430.2 billion and is projected to be the fourth largest federal tax expenditure in 2007-2011.”

    There are few sentiments from the other side of the aisle that are quite as grating as the idea that deductions “cost” the government money.

    They don’t.

    Refundable tax credits cost money. Social Security, Medicare, Defense, the ironically named Dept of Education – all those cost money.

    …but not having money confiscated for whatever reason is only a “cost” to the confiscator if the confiscator can truly claim to have a more inherent right/claim to that money than the person who initially earned that money.

    But maybe that’s part of the big divide – anything less than a 100% confiscation is seen by some as just a give away by the government.

  2. KipEsquire says:

    “The mortgage tax deduction for owner-occupied residences now costs $430.2 billion and is projected to be the fourth largest federal tax expenditure in 2007-2011.”

    A tax deduction is NOT an expenditure. The government does not “spend money on me” by abstaining from taxing me in the first place.

    There are valid reasons to oppose the mortgage interest deduction. “The government spends too much money on it” is simply not one of them.

  3. Frank says:

    Conservatarian and Kip may want to read David Cay Johnston’s book Free Lunch, which explains in exhaustive detail the functional equivalence of tax breaks and expenditures. Johnston has been taken seriously by Reason Magazine, as I’ve pointed out earlier on the blog. Someone has to pay for the federal budget, and if we’ve learned one thing from the past several years, it’s that “starve the beast” tactics to force lower expenditures via lower taxes don’t actually work–they just lead to extraordinary borrowing.

    As to the main point of your post: I completely agree that we need to question this tax expenditure, particularly given its status as an “upside down subsidy” (explored by Stanley Surrey in works like this:

    It most helps people with the most expensive houses!

    The subprime crisis uncovers a deep flaw at the heart of the “ownership society” ideology: asset bubbles and fluctuating prices leave virtually no one secure in hoping to fund their retirement or medical expenses with, say, a reverse mortgage. As Jacob Hacker states in The Great Risk Shift, real security comes from public commitment to those types of assistance. In the spirit of Janis Joplin on freedom: in an ownership society, you’re on your own.

  4. stefan says:

    Where do you get the $430.2 billion figure from? All estimates I’m familiar with are considerably lower. $430.2 billion looks like it could be the amount of deducted mortgage interest payments, not the tax revenue lost to the mortgage interest deduction.

  5. Lori Ringhand says:

    Stefan: The dollar amount is from the Joint Committee on Taxation’s Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011. It’s the total estimated amount. Each year is as follows: 73.7 2007, 79.9 2008, 85.2 2009, 90.5 2010, 101 2011.

  6. Where I originally grew up in the UK, the government decided in the 1980’s to gradually eliminate the mortgage interest tax deduction. It was quite clear that the deduction fuelled property price increases. when I was first getting into property ownership the perceived wisdom as explained to me numerous times by house owners was to borrow big, since you got more tax relief (it also helped that rates of inflation were higher in the UK, which rapidly reduced the real value of repayments over time). I believe that the deduction has all but disappeared in the UK. Property prices continue to rise however.

    I see the mortgage interest tax deduction as a regressive subsidy, in that richer people get more benefit from it than poorer people, because they can invest more money against which they get tax relief. It is also a market-distorting subsidy in that it encourages people to spend and speculate beyond their means. I believe it should be eliminated. Eliminating this tax break in the USA may reduce the tendency to speculate on property, but it will not eliminate it. Basically any developed country where land is becoming scarce will experience boom to bust property cycles. I watched 3 of them in the UK, including one where I ended up in negative equity. I also saw the same pattern of lenders mysteriously ignoring sensible lending criteria and lending to anybody with a pulse who could sign paperwork, only to undergo a Saul of Tarsus conversion when prices dropped and immediately re-discover those criteria. I actually was pressured to take out a bigger loan in 1991 than my wife and I could afford with blanket statements like “you can’t lose” (I am glad I ignored that siren song…)

    Now that property prices are slumping in many areas of the USA I am seeing the same consternation, denial, and shovelling of blame here that I saw in the UK.