Paul Krugman asks a question that has been addressed at Market Urbansim:
But here’s a question rarely asked, at least in Washington: Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?
Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic.
Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own.
(Krugman neglects to mention that landlords also deduct mortgage interest, passing some of the savings to tenants. However, landlords pay taxes on income and gains, which the homeowner usually does not.)
Krugman then gives 3 downsides to society of encouraging ownership:
First of all, there’s the financial risk. Although it’s rarely put this way, borrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.
I agree, sometimes these risks are better absorbed by the capital markets if the risks cannot be properly diversified through an individual’s portfolio.
Owning a home also ties workers down. Even in the best of times, the costs and hassle of selling one home and buying another — one estimate put the average cost of a house move at more than $60,000 — tend to make workers reluctant to go where the jobs are.
Finally, there’s the cost of commuting. Buying a home usually though not always means buying a single-family house in the suburbs, often a long way out, where land is cheap. In an age of $4 gas and concerns about climate change, that’s an increasingly problematic choice.
(Krugman’s third drawback has become nearly irrelevant as condos have been built in urban areas and apartments have been converted to condos during the past decade. )
Arnold Kling notes that homeowner subidies are regressive and adds:
Traditionally, one positive externality of home ownership is thought to be that owners maintain their properties better, and this helps maintain property values for others.
However, I would counter there are positive externalities of rental buildings. As I mentioned in a past post on the mortgage interest tax deduction that rental developers have the financial incentive to construct a more energy efficient, and more easily maintainable property than a build-and-flip developer.
Also, by raising the cost of moving, ownership helps stabilize a neighborhood. Seeing the same people year after year helps people feel more secure. Also, more home ownership might mean that more people will have an interest in long-term public goods, including roads and schools.
But this cuts both way. Look at Detroit or any city that suffered from loss of manufacturing jobs. When jobs leave an area, market frictions such as rent control, public housing, moving costs, and emotional attachment keep people from relocating to where jobs are more plentiful, exacerbating the local economic problems.
Similar to what Bill commented in Mortgage-Interest Deduction: The Unseen Costs Kling concludes:
The problem is that the value of the subsidy has been capitalized into the prices of existing homes. If you take away the subsidy, then people will take capital losses.
Similar to what I had argued in the comments of the past Market Urbanism post:
Part of the value of the deduction ends up baked into the value of the property, which is a part of why there is a premium value of owned property vs rented. So, in the long run, the net effect of the deduction is smaller. The short term effect of eliminating the deduction would hurt, but in the long-run housing prices would lower slightly.