Wednesday, November 14, 2007

Quote of the Day: Why Homeownership May Be Bad

The mortgage-interest deduction is the backbone of American housing policy. It exits to encourage widespread homeownership. In its favor, it doesn’t actually do that. But it does have consequences: It’s been one of the quieter causes of the housing bubble. The mortgage-interest deduction deserves special recognition for the stupidity with which it subsidizes something that should not be subsidized in the first place. I challenge you to design a subsidy for home ownership that is as wasteful, as unfair, and as harmful to the economy in the long run.

The current deduction costs nearly $80 billion a year in foregone revenues. It is available only to the minority of households – typically affluent – that itemize their taxes. Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership. What it does promote, studies show, is spending on housing – that is, people who would have been owners anyway pay more for their houses. Prices are higher than they would otherwise have been, and mortgages are bigger. As many owners have learned abruptly, this can worsen economic insecurity.

Conclusion: A tax break (mortgage-interest deduction) that fuels speculation and overborrowing, that widens income inequality, and that fails its own questionable purpose deserves a lingering death.

~From "Housebound: Why Homeownership May Be Bad for America," by Clive Crook in the December issue of "The Atlantic" (subscription required)


At 11/14/2007 3:42 PM, Blogger Colin said...

Apparently you didn't get Krugman's memo that what we actually lack is greater government involvement in the housing sector:

At 11/14/2007 3:42 PM, Blogger Dan Fondren said...

I disagree with Mr. Cook. Only available to the minority of households? Typically affluent? Get real. This deduction is a huge benefit.

At 11/14/2007 6:00 PM, Anonymous Anonymous said...

I can't agree with the article because you have to assume that the government should have your money in the first place.

How about this for an analogy: The government takes your billfold that has $100 in it (your paycheck) and removes 25% of the money from it (taxes) and returns the billfold with the remaining money in it ($75 now called net pay). A few months' later, they mail back $5 to you of your own money (mortgage interest deduction).

A little while later someone writes an article that says you should have not gotten your own $5 back because it's a subsidy, and it’s wrong and counter productive. How so? The only thing I see wrong is that renters don’t get some of their tax money back just as the homeowners did.

Or even better yet, how about not taking the money in the first place. Now there’s a novel idea—just lower everyone’s taxes.

At 11/14/2007 7:02 PM, Blogger Mark J. Perry said...

How about this though: The $5 that the high-income homeowner received in a tax subsidy came from $5 in higher taxes that a low-income renter had to pay to generate the subsidy for the homeowner?

At 11/14/2007 7:39 PM, Blogger juandos said...

Well I do know one thing about NOT owning a home, I never have suffered the humiliation of mowing the lawn...

At 11/15/2007 7:28 AM, Anonymous Anonymous said...

Professor Perry:

Do the renters you speak of have children or, if low income, use the Earned Income Tax Credit (EITC) to get back more money than they actually paid in taxes?

As someone who has never been able to use personal exemptions for children at tax time or use the EITC, I’ve never felt guilty using the IRS redistribution of wealth scheme by claiming a tax deduction for my home mortgage interest. There’s plenty of unfairness in that system for everyone.

At 11/15/2007 10:13 AM, Blogger Colin said...

I live in Georgetown in Washington, DC. I rent and have no children. Why should I subsidize the very expensive residences that my neighbors live in? Why are they more deserving of a tax break than me?

Also, they make far more money than I do (I live in a group house with 3 roommates).

At 11/15/2007 10:57 AM, Anonymous Anonymous said...


If you each have an income of $25,000 per year, your household income is $100,000 per year. Pat yourself on the back because you are among the top household income earners in the U.S. Don't you feel rich? Why would you expect a tax break?

I'm just kidding. Strange how manipulating some figures around changes the real picture.

At 11/15/2007 10:59 AM, Anonymous Anonymous said...

Great point! If you go through the math, you find that owners of less expensive homes get much less benefit, if at all. There is a "built-in" benefit for those who don't itemize, and so the mortage interest deduction only benefits those who are making larger interest payments.

Example: Those holding a 30-year mortgage on a $100K home don't get much benefit than they would get otherwise, whereas those with a $300K mortgage get a huge EXTRA benefit. Don't believe me? Get the tax forms and do the math!

But yes, there are other huge inequities in the tax code.

The only problem is the title of the post. It should be: "Why the mortgage interest deduction may be bad." Home ownership is fine.

At 11/15/2007 6:54 PM, Anonymous Anonymous said...

This article is nonsense and makes a flawed, argument. In fact, it really makes no sound argument in that the author only says "subsidizing something which shouldn't subsidized is stupid."

The $80billion in lost revenue is eclipsed by the local revenues generated in property tax.

Renters pay no such tax.


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