Thursday, August 18, 2011

Ending home ownership subsidies

An op-ed in yesterday's New York Times by a group of NYU business professors suggested that the United States reconsider the many ways in which the government subsidizes home ownership. Between the Fannie Mae and Freddie Mac twins, the income tax deduction for home mortgage interest and local and state taxes, and the favorable treatment afforded capital gains on the sale of a primary residence, the authors argue that the US subsidy of home ownership costs the government $700 billion over a five year period. Besides this revenue drain, these subsidies also promote negative behavior among homeowners. Mortgages made cheaper by government backing allow individuals to "borrow more than they could afford" which in turn leads to the purchase of houses larger than are truly needed. This ability to become highly leveraged in home ownership was a major factor in the loss of $8 trillion in household net worth during the collapse of the housing bubble. The authors do acknowledge that these subsidies cannot be ended all at once: the shock to the system would be too great. Instead, the country should be weaned off of them gradually, over a ten year period, perhaps.

While this is certainly an interesting proposal, one I think has much merit, the likelihood of it being enacted in the face of widespread support for the subsidies by homeowners and hyper intense lobbying by all those whose livelihood is positively effected by these subsidies, is probably quite remote.

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