Real Estate

A New Homeowner Subsidy Isn’t Needed. Here’s Why.

President-elect Joe Biden’s plan for reviving the U.S. economy may include a tax break aimed at boosting homeownership. Really?

According to a recent MarketWatch article, “The Biden plan would create a new refundable tax credit of up to $15,000 for eligible first-time homebuyers.” Even sweeter, the beneficiaries would not have to wait until tax time to reap their windfall. The proposed credit would reportedly be collectible at the time of the home purchase.

This report came on the heels of Toll Brothers CEO Douglas C. Yearley telling Time, “Since May, we’re in the hottest housing market that I’ve seen in those 30 years.” Possibly the biggest hazard the homebuilders face at present is that lumber demand is so fierce that cost increases could cut into their margins. Only a politician could put these facts together and conclude that America urgently needs yet another homeownership subsidy.

Apparently, little has changed in the political economy of homeownership incentives since I discussed the topic in my 2006 book, Unwarranted Intrusions: The Case Against Government in the Marketplace. Countries such as Canada and Australia have homeownership rates equivalent to or higher than the U.S. without inducements such as mortgage interest deductibility or support by government-sponsored enterprises akin to Fannie Mae and Freddie Mac. Nevertheless, elected officials of both major parties are always eager to pile on more subsidies.

The reason is that the housing lobby is a formidable force, thanks to the presence of banks, homebuilders and mortgage brokers in every congressional district. This dynamic has produced a highly effective public relations campaign that equates (falsely) homeownership with the American Dream. That term originally referred more broadly to upward mobility. Economic studies have shown that for many parents hoping to see their children do better than themselves, investing in education is more productive than tying up savings in a house.

When I stated above that little has changed in the economics of homeownership subsidies since 2006, I did not mean to imply that nothing at all has changed. In fact, there has been one very important change, namely, the 2008 housing crisis, which nearly brought down the entire financial system. Have we truly learned nothing from that catastrophe? What we should have learned is that lifting the homeownership rate by artificial means from around 65% is an extremely unwise policy.

Yes, certain social benefits are associated with owner-occupied homes. The value of those benefits are quantifiable and the bottom line is that they do not justify the amounts that the U.S. pours into efforts to raise the homeownership rate. Research conducted at Princeton University and the Federal Reserve Bank of Dallas has found that our gross national product would be 10% higher if not for our overinvestment in housing.

There is one bright note in all this. President-elect Biden’s January 14 speech laying out his economic plan made no mention of a tax credit for first-time homebuyers. An optimistic interpretation is that inside the incoming administration, good economic sense has prevailed over the housing-industrial complex’s massive political clout. A more pessimistic view is that savvy politicos have opted for a strategy of low-profiling the tax credit, recognizing the controversy it could trigger. If that is the case, we need to keep an eye out for an attempt to sneak the credit into an economic package in which sounder proposals receive more fanfare.

With a pandemic still underway and with high unemployment still creating widespread hardship, the new team in Washington should get a fair chance to address the nation’s genuine economic problems. This does not mean, however, that egregiously bad ideas should sail through Congress for the sake of seeing the good ones enacted. Joe Biden’s team has made it clear that taxes will rise to pay for measures deemed essential in the present crisis. Necessary though that may be to maintain some semblance of fiscal balance, higher taxes are inherently a drag on the economy. One good way to lessen the need for increased government revenues is to avoid new, unnecessary expenditures aimed at appeasing special interests such as the real estate lobby.

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