Just How Regressive is America’s Federal Housing Policy?
(ed. note. Please welcome contributor Chris Bradford, author of the economics blog Austin Contrarian.)
As this recent Congressional Budget Office (CBO) report reminds us, the answer is "very regressive."
The disparity between the federal government’s support for homeowners and renters is stark. In fiscal year 2009, according to CBO, Washington spent almost four times as much money ($230 billion) to support homeownership as it did to improve rental affordability ($60 billion).
That spending on homeowners included $80 billion for the tax deduction for mortgage interest, $16 billion for the state and local property-tax deduction and $16 billion for the capital-gains exclusion.
But it also included temporary commitments, such as the Obama administration's mortgage modification program ($75 billion) and the first-time home buyer tax credit ($14 billion). And let's not forget the continuing federal outlays to subsidize Fannie Mae and Freddie Mac’s credit activities ($43 billion).
By contrast, Washington devoted just $60 billion to improving rental affordability, mainly through a combination of low-income housing tax credits, Section 8 rental assistance, and public housing.
Most people, I think, will acknowledge a general uneasiness with this disparity. It seems unfair for the government to spend 80 percent of its housing budget on the 67 percent of its households who own property.
What's more, these federal subsidies flow disproportionately to the most affluent of those households. Homeowners see no benefit from the mortgage interest, property tax or capital-gains deductions unless they itemize -- which means that many homeowners get little or no actual subsidy. The subsidy rises with the value of the home and the tax bracket of the buyer.
In other words, the federal government handsomely rewards the affluent for buying expensive homes and leaves renters (as well as low-income home owners) relatively worse off in the process.
But Washington's housing subsidies, which have continued under both Democratic and Republican administrations, have an even more insidious impact in the nation's most expensive markets. There, they make renters worse off in absolute terms by raising the overall cost of housing.
How does this happen? While federal homeowner subsidies nominally flow to home buyers, the actual beneficiaries depend on the particular housing market.
In markets where it is easy to add new housing -- those with an elastic supply -- rising demand spurs more new housing rather than higher prices. Home buyers do indeed receive the subsidies’ benefits (though they often take an environmental hit from new, often sprawled construction patterns). The federal programs reduce their cost of housing without raising the cost of housing for renters.
But the story is different in markets with high demand and tight supply, such as the expensive markets on the coasts -- highly desirable, highly productive metropolitan areas constrained both by geography and restrictions on new construction. In these markets, sellers possess a scarce good in high demand and can force buyers to bid away their federal subsidies. The federal subsidies are bundled into the sales price; in the end, home buyers are neither better off nor worse off than without the subsidies.
Renters, however, are unequivocally worse off. Inflating the price of owner-occupied housing squeezes up the price of rentals, too, as higher home prices force would-be buyers to look elsewhere for housing. The federal price premium trickles down to all market segments, causing higher prices across the board.
But unlike buyers, renters do not enjoy large offsetting subsidies from Washington. They are stuck with higher real prices ... until they decide to flee for a city with cheaper housing. The relative pittance the government spends on rental housing cannot begin to remedy the imbalance (and might actually make things worse, to the extent the government merely creates more demand for housing without stimulating new supply).
The federal homeowner subsidies are thus doubly regressive in our most expensive cities. These cities have the richest residents living in the priciest homes that command the largest subsidies. And these cities have the tightest housing markets most vulnerable to distortions in demand. These places would undoubtedly be expensive to rent in anyway -- I can’t imagine center-city San Francisco being affordable to a young, working-class household -- but are decidedly less egalitarian, thanks to our federal government's housing programs.