Just How Regressive is America’s Federal Housing Policy?
(ed. note. Please welcome contributor Chris Bradford, author of the economics blog Austin Contrarian.)
As this recent Congressional Budget Office (CBO) report reminds us, the answer is "very regressive."
between the federal government’s support for homeowners and
renters is stark. In fiscal year 2009, according to CBO, Washington
spent almost four times as much money ($230 billion) to support
it did to improve rental affordability ($60 billion).
spending on homeowners included $80 billion for the tax deduction for
mortgage interest, $16 billion for the state and local property-tax
and $16 billion for the capital-gains exclusion.
But it also
included temporary commitments, such as the Obama administration’s mortgage modification program ($75 billion) and the first-time home
buyer tax credit ($14 billion). And let’s not forget the continuing federal outlays to subsidize Fannie Mae and Freddie
Mac’s credit activities ($43 billion).
contrast, Washington devoted just $60 billion to improving
rental affordability, mainly through a combination of low-income
housing tax credits, Section 8 rental assistance, and public
people, I think, will acknowledge a general uneasiness with this
disparity. It seems unfair for the government to spend 80 percent of
its housing budget on the 67 percent of its households who own property.
What’s more, these federal subsidies flow disproportionately to the most affluent of those
households. Homeowners see no benefit from the mortgage interest,
property tax or capital-gains deductions unless they itemize — which
means that many homeowners get little or no actual subsidy. The subsidy
rises with the value of the home and the tax bracket of the buyer.
other words, the federal government handsomely rewards
the affluent for buying expensive homes and leaves
renters (as well as low-income home owners) relatively worse off in the process.
Washington’s housing subsidies, which have continued under both
Democratic and Republican administrations, have an even more insidious
impact in the nation’s most
expensive markets. There, they make renters worse off in
absolute terms by raising the overall cost of housing.
How does this happen? While federal
homeowner subsidies nominally flow to home buyers, the actual beneficiaries depend on the particular housing market.
markets where it is easy to add new housing — those with an elastic
supply — rising
demand spurs more new housing rather than higher prices. Home buyers do
indeed receive the subsidies’ benefits (though they often take an
environmental hit from new, often sprawled construction patterns). The
programs reduce their cost of housing without raising the cost of
housing for renters.
the story is different in markets with high demand and tight supply, such as the expensive markets on the coasts — highly
desirable, highly productive metropolitan areas constrained both by
geography and restrictions on new construction. In these markets,
sellers possess a scarce good in high demand and can force buyers to
bid away their federal subsidies. The federal subsidies are bundled
into the sales price; in the end, home buyers are neither better off
nor worse off than without the subsidies.
are unequivocally worse off.
Inflating the price of
owner-occupied housing squeezes up the price of rentals, too, as
higher home prices force would-be buyers to look elsewhere for
housing. The federal price premium trickles down to all market
segments, causing higher prices across the board.
But unlike buyers, renters do not enjoy large offsetting
subsidies from Washington. They are stuck with higher real prices … until they
decide to flee for a city with cheaper housing. The relative pittance
the government spends on rental housing cannot begin to remedy the
imbalance (and might actually make things worse, to the extent the
government merely creates more demand for housing without stimulating
federal homeowner subsidies are thus doubly regressive in our most
expensive cities. These cities have the richest residents living in
the priciest homes that command the largest subsidies. And these cities
have the tightest housing markets most vulnerable to distortions in
demand. These places would undoubtedly be expensive to rent
in anyway — I can’t imagine center-city San Francisco being affordable to a
young, working-class household — but are decidedly less egalitarian,
thanks to our federal government’s housing programs.