Tuesday, January 18, 2005

Housing bubble plus dumb Bush program equals trouble

According to this WSJ.com article, The Housing Market's Dangers (free link):

One issue on which Republicans and Democrats agree is that more people should own their own home. It is part of President Bush's "ownership society" initiative. Homeownership has risen to a record 69% of all households, from 67.5% when Mr. Bush took office in 2001, despite persistent unemployment.

If Republicans and Democrats agree on something we should watch out. Why is it such a good thing for people to own their own home? We should let the free market decide if people prefer to own or rent. Renting has many advantages, most significantly the ability to move easily without having to deal with steep transactions costs associated with buying and selling a house. There is also less risk because you don't have to worry about the value of your home declining. And I love the covenience of having the apartment building's maintenance staff fix my broken sink while I'm at work!

Low interest rates get most of the credit, but Mr. Bush would like to nudge it along. His American Dream Downpayment Initiative, signed into law in 2003, offers as much as $200 million a year to subsidize first-time home buyers' down payments, especially for low-income and minority families. He has instructed his tax-reform panel to preserve tax breaks for homeowners. At the same time, he has tried to curtail rent subsidies.

Yet another wasteful government program spending the taxpayers' money based on a dubious social theory. And why do we need tax breaks for homeowners, a wealthier than average group that doesn't need a special tax benefit? Tax reform should be about simplifying the tax code and eliminating all of the complicated and unnecessary special tax breaks that make filling out a 1040 so time consuming.

But are these policies wise? Housing prices, adjusted for inflation, are up 36% since 1995, the steepest boom in at least 50 years, according to Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "This is a particularly bad time to be promoting homeownership among young people," Mr. Baker told a media briefing last week. "A lot will see substantial losses in home value as a result of that bubble, which will be ending soon."

Since I don't own a home, I'm looking forward to the collapse of the housing bubble! Because there's no way I'll ever afford a house at these high prices unless I marry a rich husband (hmmm, that doesn't sound like such a bad idea).

But the point of the quoted paragraph, that a peak in housing prices is the worst time to promote home ownership, sounds like common sense to me.


Some other interesting posts I found on this topic: Accidental Verbosity and PrestoPundit.


TWM said...

I have yet to meet a homeowner that would like to get rid of the tax deductions associated with home ownership. And my guess is once you, or your rich hubby, buys your first home, you won't want to get rid of them either.

Oh, and this impending collapse of the housing bubble is much disputed by economic experts so I wouldn't be opening any champagne just yet.

Anselm said...

I can see we agree on some things and not on others. That's the way I like it, gets boring otherwise. I'm blogrolling you. Great post on the why the war was justified BTW, succinct yet complete.

mikeca said...

I live in the California Bay Area since 1976 and I have lived through a number of housing bubbles. There was a big bubble in the late 1970s, another big bubble in the late 1980s and a big bubble in the late 1990s. I expected housing prices to come down after 2001, and they did a little bit, but now they have been going up more.

Several points about housing bubbles at least in California:
1) Prices have usually come down 10-15% after the bubble burst, and then stayed relatively constant or slowly increasing before the next bubble came along.
2) The price fluctuations are much larger for expensive houses than they are for low-end houses.

To get a real collapse in the housing market, you have to have a big oversupply problem, with a lot more houses having been built then there is demand. This happened, for example, in Texas in the mid 1980s when the oil marked and the whole local economy collapsed. Absent a big collapse of the local economy and job market (not likely in Washington, DC area), the US will survive a burst of the housing bubble. This is not to say that some people will not be hurt, especially people who try to jump in and speculate in the housing market as it is peaking. I have known people who made that mistake in almost every boom, and one of them lost everything, including one person who lost a house he had lived in for 30 years and almost had paid for.

Libertarian Girl said...

David, you're completely wrong about me. Unlike a lot of greedy voters, I have civic virtue. I would say the same thing about tax breaks for home ownership even if I owned one.

Aaronlane said...

It's difficult to get any more than two economists to agree on where to eat lunch, let alone the entire US housing market. There is little agreement on whether this is a housing bubble or just a general rise in prices responding to the market.

If this is in fact a bubble created by market failures or interventions, then it is an excellent time to provide a subsidy. This, of course if you believe you can correct one market failure with another interventionist policy.

Following the same thread, if you ARE going to intervene with some type of correction a subsidy is much preferred than just about any other attempt to 'correct' the market.

Personally I doubt this is a true housing "bubble", but prices may be somewhat inflated due to a long period of low interest rates and relatively stable employment. We may also see a correction as the top end of baby boomers... uhh... shift housing arrangements.

Obviously the subsidy would be better left in the hands of the people who earned the money originally. Working in public policy I rarely see the best possible outcome come to fruition. I hope for marginal changes, marginal improvements, one step further toward a more civil society.

For that reason I generally support just about any tax break for almost everyone. I also have the constant hope that piling one upon another will cause the tax code to eventually crumble under its own weight and add to the calls for a flatter tax.

This is similar to the way that I don't mind government funding for the arts. Sure its wasteful spending, sure its theft from productive labor. But at least it isn't hurting me. If you're going to spend my money to buy a hammer, at least refrain from whacking me WITH the hammer.

R said...

"Unlike a lot of greedy voters, I have civic virtue."

No, you don't. You're just as greedy as those who love the tax breaks they get from owning a home. It's just that you don't know it.

You are an alleged "libertarian." I hope you at least know that libertarians want smaller government. The reason they, and you, want this, is, as you've said, because you see a lot of programs as "wasteful government" programs "spending the taxpayers' money"; i.e., your money. Ergo, you care very much about not having to pay as much taxes as you do currently.

Same with homeowners. We're all looking for tax breaks. You just want smaller government to achieve that end. Same difference.

"Why is it such a good thing for people to own their own home?"

Boy, you're not playing with a full deck, are you?

dadahead said...
This comment has been removed by a blog administrator.
dadahead said...

HEY why did my comment get removed???

Dadahead wants ANSWERS.

Anonymouse said...

While your intended virtue with respect to the mortagage interest deduction is commendable, it isn't credible. You obviously live your life according to your best financial interest.

Why else would a Libertarian work for a federal government agency?

TWM said...

Hmmm, did I say you were greedy? If I had then I would be describing myself, since as a homeowner I much appreciate the tax deductions I receive each year.

I was simply stating the reality of the situation - homeowners love em; rent payers resent em.

And this is my second house. I started off like you - as a renter (Well, after military housing that is) - and then worked my way up from a starter home and finally to the home we live in now which, no doubt, were it to be located somewhere near Washington D.C., would be one of those homes you "would need a rich hubby" to afford. I paid $145,000 for it seven years ago and it is worth $249 now - real estate - gotta love it!

And the thing is, I am not rich. What non-appointed government employee is? I simply worked my ass off, saved, and moved into home ownership slowly. Tax incentives help people who work hard to buy homes.

And yes, there are hard workers who do NOT want a home of their own. But as far as I know one of the constant big American dreams is home ownership and that remains a driving force for many people when it comes to productivity and economic advancement. Is that a social program? Perhaps - but the benefits of a "home ownership" society far outweigh the cost, because the work force moves forward and makes more money to spend, etc., etc. In other words - lower taxes generate revenue.

Now, before all you ecnomoic "experts" jump on me, I acknowledge I am not as educated as you on economics and housing bubbles and, maybe anything else. My statement is anecdoctal at best. But I know that I was driven to succeed in part so I could have a home for my family. And I believe millions of Americans do the same.

And now I gotta go to work. See you guys later!!

Libertarian Girl said...

dadahead, since you claim to be so much smarter than me, why don't you explain when it's appropriate for a blog owner to delete a post?

Charles said...

I own a home and probably couldn't without the tax breaks. Or at the very least I wouldn't own the home I am paying on. Why is smaller government a bad thing, whether achieved through paying less tax in the first place, responsible money management by the government workers (actually the elected government dole workers we put in charge of the money), or by being thankful they decide to allow me to have some of my money back in the form of a tax break or subsidy (and if that isn't backward, I don't know what is!)?

I shoulda married a rich wife and had her buy several houses, SUVs, a private jet to fly me around... no wait, that would make me a democrat presidential candidate loser...

Libertarian Girl said...

The mortgage interest tax break you get is not just your money you're getting back, it also includes other people's money, money of taxpayers who don't qualify for the tax break.

If home ownership tax breaks were eliminated, then the extra revenues could be used to lower everybody's taxes.

Charles said...

So I am a greedy capitalist also living off other people's money. Hmmmm. Does that make me a democrat? Guess I will have to hang around here more to be converted. That idea about dumping the credit and lowering my taxes through the savings on required processing, tax code simplification, and distributing taxes to actually needed programs sounds good.

I just am not sure it will work in Washington DC with a crop of "elected" representatives who are on a really expensive ride on a lot of our money.

TWM said...

I can't speak for all homeowners, but what I pay in taxes FAR exceeds what I get back from my homeowner tax break. So as far as I am concerned I am not getting any of your tax money or anyone else's for that matter.

But that aside, you seem to be avoiding the point I made earlier. The positive benefit of home ownership to our society far outweighs the cost of the lost revenue due to these breaks.

EZE said...

There are a lot of potential downsides to encouraging home ownership above where it otherwise might be. The opportunity cost of the equity is an obvious one. Were I not dumping a million in equity into a condo, I might be investing in company A which might be providing more jobs were its cost of capital lower for instance.

Having said that, any tax break is a good one, I just wish that renters got to deduct rent. And why should homeowners only get to deduct interest? Why not the principal of the loan as well?

Dan said...

Why is it such a good thing for people to own their own home? We should let the free market decide if people prefer to own or rent. Renting has many advantages . . . And why do we need tax breaks for homeowners, a wealthier than average group Certainly not everyone wants/needs to own their own home, and renting does have some advantages, especially for young singles, new arrivals, and other variously transitional folk, and in certain environments (urban downtowns). But renting also has significant disadvantages, including landlords (Dig up my garden? Ah . . ok, Mr. H___), greater cost over time, no home equity, etc.

Note that along with the tax breaks, the ADDI supposedly focuses on " low-income and minority families," not a wealthier than average group (I take it as an article of faith that any law touched by Bush will have negative consequences, but let's pretend). Why would people want to encourage homeownership among these families, instead of letting the free market work its magic?

Some feel that home ownership will promote stability, better stewardship, and middle-class values. More realistically, home ownership can be a extremely significant economic advantage - not only is it significantly cheaper over the long run, it functions as a source of wealth and a major help with such things as college loans for the kids. Therefore, home ownership can be seen as a tool to help fix lesson some of the more intractable inequalities in American society. I know this is ideologically unacceptable, but just in case you were wondering. . .
(Not to say that a housing bubble is the best time!)

Noting that you've just recently graduated from college - it would be interesting to see if your ideas change as you (and other young libertarians) move through different life stages, as David suggested. Hey, if you manage to reconcile ideology and reality in some useful and personally satisfying way, hats off to you!

I do envy the freedom of having the maintenance staff fix stuff while you're away! (Although note that this is specific to apt. renting - we're shelling out a disgusting amount every bloody month for the first floor of a (subdivided) house, and each time the antique furnace has another problem involving a part not made since the Paleolithic (well, close enough) someone has to wait all day for the repair guy to show up, unfailingly with the coming of dusk . . .)

As I'm going to go over personification with the 8th graders this week, I can't help but jump on the "We should let the free market decide " bit. I know, I know, but still . . . it does subtly affect how people think about things.

-Dan S.
The Bog

andrew said...

I want to echo what Dan had touched on. Most middle and lower class people's biggest investment is in their home. If, you believe that private investment is a good thing (and I'm not saying that you do or should), home ownership is an excellent way to do that. Unlike the stock market, even in the middle of a downturn it'll still be there as a roof over your head. Homeowners are also, literally, invested in their community and, in my opinion better neighbors.

fling93 said...

I'm a homeowner, and I oppose the mortgage deduction. It's a condo, but it's in the Silicon Valley. Bought it eight years ago.

Of course, I bought a place that I can afford without the deduction (indeed, my mortage payment is now lower than most rents for a comparable place). The real estate industry gets paid by commission, and thus has a vested interest in high property values, and this is why realtors try to talk their "customers" (they really work for the seller, not the buyer -- and it's funny how most people don't know that) into buying the most expensive house that they can afford. If you fell for that, well, that's your own fault and hardly the fault of the renters who are helping to subsidize your loan payments. Indeed, who knows many renters there are who will never be able to afford to save for a downpayment because of the higher tax burden homeowners are imposing upon them?

In the long run, removing the deduction won't be catastrophic, as it's one of the reasons home prices are artificially high. Remove government support, and prices will come down, which will allow more people to buy homes (albeit a bit fewer than those that can with the subsidy). And as this hurts current homeowners (albeit homeowners who were betting on housing prices remaining artificially high), we can gradually phase out the deduction to ease the transition.

I can see that the subsidy is unfair. Those homeowners who don't are just being selfish.

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