$450 Billion in Federal Subsidies Tilt U.S. Real Estate Market Toward Sprawl

Real estate in the United States, it turns out, isn’t really guided by “the invisible hand” of the free market.

Federal housing subsidies flow disproportionately to single family homes over multi-family -- distorting the housing market. Image: Smart Growth America

In truth, federal policy puts a finger on the scale in a major way. Even apart from the quasi-governmental Freddie Mac and Fanny Mae, the federal government is the single largest investor in the American real estate market. And according to a new report from Smart Growth America, each year an assortment of subsidies, tax credits, and deductions exerts $450 billion worth of influence on the location and character of American residences and commercial spaces.

That massive influence can distort the market in significant, and insidious, ways.

“Viewed as whole, federal funds are not targeted to those most in need, are not targeted to strengthen existing communities and are not targeted to places where people have economic opportunities,” says Smart Growth America’s research team.

For starters, according to SGA, not a single federal program is primarily focused on support for existing neighborhoods. Government priorities are often contradictory on this front, with subsidies operating at cross-purposes. One program may subsidize new housing in undeveloped locations, for instance, while another attempts to shore up the city neighborhoods left behind. These programs also fail to factor in what it costs to support real estate development: There is no preference for projects with lower long-term infrastructure costs, leading to higher spending on things like roads and sewers at the local and state levels.

Overall, the report suggests, federal real estate interventions undermine market trends toward the development of more walkable places. About 85 percent of federal housing subsidies flow to single-family housing over multi-family, although only 65 percent of American households are homeowners and the majority of renters live in multi-family buildings. This has hampered the market for rental housing even as demand for multi-family rental housing has soared following the housing bust.

“Federal real estate spending is stuck in the past,” said smart growth-focused real estate developer Chris Leinberger in an SGA-sponsored call with reporters yesterday. “It’s not what the market wants today, it’s what the market wanted in the ’70s and ’80s and into the ’90s.”

Leinberger added that while consumers are demanding walkable urbanism, federal policy stands in the way of that kind of development — to the detriment of the economy.

Some federal programs, for instance, establish “use limits” on low-cost loans. In order to apply for an Federal Housing Administration loan or loan guarantee, a builder has to limit the amount of commercial space in the project, which ends up favoring more spread out, single-use development over the more walkable, mixed-use approach. The agency just raised the use limit for condo buildings, but more reforms are needed.

“Real estate represents 35 percent of the asset base of the country,” Leinberger said. “It’s time to get the real estate industry back engaged.”

All these government real estate subsidies add up to a regressive, poorly-targeted, and wasteful use of public funds. The largest expenditure, the mortgage interest tax deduction, overwhelmingly benefits households making more than $200,000. These households receive three times the benefits from the deduction as all other income groups combined. In addition, almost one in three households who collects the mortgage interest deduction also does so on a second home — a fact that clearly doesn’t square with the program’s stated goal of promoting homeownership as a path to the middle-class. Meanwhile, “little support” in any of the 50 housing programs examined by SGA “is going to the middle class,” said Ilana Preuss, vice president of Smart Growth America.

SGA is urging federal policy makers to develop an overarching set of goals to ensure U.S. taxpayers get the best possible return on their investment in real estate.

  • Anonymous

    Federal policy through things like the mortgage tax deduction and the GSEs is bad, but local regulations have a much bigger impact. In most places, you can’t build multi-family housing thanks to zoning laws, unless you’re a big, well-connected developer with the resources to secure political favors and fight off bogus NIMBY lawsuits. We could make huge progress if individuals who currently own SFRs were able to build 2-4 story apartment buildings on their lots, but the average SFR owner does not have the resources to overcome the regulatory and legal obstacles.

  • Anonymous

    Mortgage guarantees are for different housing typologies. There is nothing precluding a high-rise residential skyscraper qualifying for HOA-backed financing for its dwellers.

    The premise, and a very wrong one, of the whole argument presented is that multi-family units are necessarily rentals, or that home ownership is inherently pro-sprawl on itself. 

  • DanaPointer

    Amen . Tried and failed to add few hundred square feet of infill. Greenfield monstrosities are just so much cheaper and easier per sq ft than infill, and there is very little govt support where it would most be needed, existing towns.

  • True Freedom

    @northendmatt:disqus Allowing SFR to build 2-4 story apartments on their lots is a horrific idea, unless you get unequivocal buy in from 100% of the other homeowners in the neighborhood. 

    Zoning laws exist, in part, to ensure a property owner as to future land uses around their property.  Pulling the rug out from under existing homeowners by changing the zoning within their neighborhood is tantamount to THEFT, in reduced home value.

    I would never want an apartment built next door to my home.  I passed on buying several properties because they had apts next door… people sitting on their balconies looking into the backyard..

    A home is likely the most expensive purchase a person will ever make.  We need laws that help protect the owner’s investment.

  • Davistrain

    Not sure whether this is an “urban myth” or there’s some truth behind it: Many years ago I had a colleague who believed that government programs encouraging suburban development were secretly promoted by “the establishment” who wanted to get the working class out into the Levittowns and Lakewoods so they wouldn’t be concentrated in dense city housing where they could be rallied by Communist agitators.  The idea was that the workers would be too busy taking care of houses, mowing lawns and fixing cars to have time for Commie gatherings.   

  • Station44024

    So true freedom is being regulated by the government to protect your neighbors investment. Got it.

  • patrick

    nice post……i like Novated Lease

  • Alec H.

    “Zoning laws exist, in part, to ensure a property owner as to future land uses around their property.  Pulling the rug out from under existing homeowners by changing the zoning within their neighborhood is tantamount to THEFT, in reduced home value.”
    Maybe on Heritage Foundation World, but not here on Earth.
    “I would never want an apartment built next door to my home.  I passed on buying several properties because they had apts next door… people sitting on their balconies looking into the backyard..”
    The fact that you ‘passed’ on these properties is the free market in action, or one might say “True Freedom” 🙂
    “A home is likely the most expensive purchase a person will ever make.  We need laws that help protect the owner’s investment.”Upzoning does not impact their investment, except perhaps to raise property values.

  • True Freedom

    @88d6041b1c3d3b3dd6e3522b6d319e24:disqus RE:  “The fact that you ‘passed’ on these properties is the free market in action, or one might say “True Freedom” :)”

    I agree.  My argument is that I made my purchase decision (partly) based on zoning.  Then, if at a later time… that zoning is changed to a classification that is in conflict with my purchase decision.. especially if it negatively impacts value.. I assert this should not be done.

    As an extreme example.. let’s say you bought a home, and then they zone next door’s previously SFR designation to be industrial use, and they put in an chemical plant.. Then, that may goes against your decision process of buying in an SFR, so your children wouldn’t have to grow up next to a chem plant.  I would assume you’d have a problem with a zone change like that. 

    RE:  “Upzoning does not
    impact their investment, except perhaps to raise property values.” 
    I think it depends on where you are.  Here in Pasadena, the homes in neighborhoods that have mixed density zoning command a SIGNIFICANTLY lower price than those in more homogenous zoned areas.  Homes that have apartments built right next door have a hard time selling

  • Richard

    Please, don’t be disingenuous…no one is talking about putting a toxic chemical plant near a home; we’re talking about apartment buildings, something quite a bit different.
    And how is the government telling me what I can and can’t do with my property “true freedom”?I must have missed the part of the Constitution that says there’s an inalienable right to “live in an economically homogenous neighborhood”. Sounds like your trying to insulate people from market forces using the government…again, how is this “freedom”?

  • Alec H.

    True Freedom, your experience is no borne out nationwide. In general, this type of zoning results in unchanged or increased property values. At any rate, as Richard pointed out, you don’t have a “right” to live in a homogenous neighborhood.

    Your freedom represents a market distortion. Please stop trying to make sprawl into some kind of inherent America right, which it isn’t. 

  • True Freedom

     @88d6041b1c3d3b3dd6e3522b6d319e24:disqus  I am no proponent of sprawl. 

    And, yes I do have a right to live in a homogenous (zoned) neighborhood… if it was zoned that way when I made my purchase decision. 

    @71fe072844a04a22c5043f6ccc0be80f:disqus I’m not being disingenuous.  You may argue that changing zoning to higher density, in order to allow
    lower income folks to buy in, is different than changing the zoning to
    industrial use.  I argue that changing zoning in ANY manner that
    negatively effects property value should not be done.. and if absolutely
    necessary (ie eminent domain type stuff) then more than adequate
    compensation should be provided by whoever is causing the zoning change.

    My position is that existing residents made a purchase decision which
    included how their property is zoned, and how that neighborhood is
    zoned.  People typically view a home purchase as a long term
    investment.  Zoning should be persistent and consistent long term as
    well.

  • Anonymous

    @eafdb538126573d539fbcf7bf3b2d4cf:disqus Your opinion seems to be that since you bought a house in an SFR neighborhood, you should get to decide by regulatory fiat that everything there should stay SFR. So if I buy a house next to a Starbucks because I really like coffee, should I get to dictate that nothing other than a coffee shop can ever be there?

    Proponents of strict zoning always resort to reductio ad absurdum. “But what if they put a chemical plant next door?” And indeed, the original intent of zoning was to prevent noxious industries like slaughterhouses from being located next to things like schools, for obvious public health reasons. The fact that you don’t like how apartment buildings look doesn’t cut it. Few neighborhoods started out as apartment buildings; they started as farms, then became SFRs, then apartment blocks in response to the market.

    It may seem counterintuitive, but less zoning would improve the value of homes that are in mixed neighborhoods. The value is depressed right now partly due to tastes, but partly due to the fact that zoning & permitting make it difficult to buy an SFR in those hoods and replace it with another apartment building. If that were an easier proposition, more people would be willing to take a chance on it, and that would drive the property value up.

  • True Freedom

    @northendmatt:disqus  Your Starbucks example is ridiculous, because it does not require a change of zoning.  If you buy next to a retail district, you must be prepared for a change in ownership to any other legally permitted retail outlet.. which may include a liquor store or marijuana dispensary.  If you’re not prepared for that, don’t buy next to a retail zoned district.  It’s the same in SFR:  I must be prepared for change of ownership.  My nice neighbor may move out and a porn star may move in.

    I’m fine with mixed use neighborhoods, as long as they are zoned that way when people buy in. 

    The hypocrisy in your argument is that you want diversity in zoning, as long as it’s the type of diversity YOU want.  The fact is.. a homogenous SFR is one type of a neighborhood that some people want.. so we should continue to allow them to exist.  Newer neighborhoods can be designated mixed from the get-go.

    Finally, if the only reason for zoning is to prevent issues of chem plants being built next to homes.. why have different zoning designations at all (other than one or two)?  The reason is.. is that people want protection for their property.. they want long term stability for their property…. homeowners want to know that their biggest life financial investment will not have the rug pulled out due to political whims, urban planning fads, social issue du jour, connected developers, rich folks trying to turn a profit, etc.

    Fortunately for me, I don’t have to worry about zoning change in my SFR.  I live in an area with a very strong (politically and financially) home association.  We recently defeated a proposed freeway expansion (that would have also negatively impacted a lower income neighborhood).  However, I think it’s sad that it takes a well connected and wealthy neighborhood to protect property rights from folks like you who would like to develop neighborhoods into YOUR vision.. which may not match the local property owners vision.

  • Andrew

    True Freedom, I believe the technical term for what you’re professing is NIMBYism.

    The issue isn’t whether northendmatt personally likes or dislikes mixed use neighborhoods or SFR’s or anything else. The topic here is about government policies that promote sprawl, and zoning regulations that bar increases in density even as population grows inevitably promote sprawl (there’s mathematically no other way around it).

    Investments are risky, by their very nature. There is no guarantee that an investment will never lose value. If you were merely saying that the government should ensure that your house isn’t burglarized, of course that’s reasonable (but it has nothing to do with an investment, per se, and applies equally to rental properties). But the government cannot possibly guarantee that your house, or any other risky investment of yours, will always retain its current value. If your neighbors would prefer a relaxation of the zoning laws in your area, how dare you insist that they cannot use their property the way they deem most appropriate! The only way to guarantee that your neighbors never do something you don’t like on their property is to buy up their property yourself. Once you own it, you set the rules.

    There is no THEFT, to use your language. There was no guarantee that zoning laws would never, ever change. Change is often needed. Fortunately, we humans have learned to adapt to changing environments.

    As Angie Schmitt says in the opening:

    Real estate in the United States, it turns out, isn’t really guided by “the invisible hand” of the free market.

    Thank you for making her case so eloquently.

  • True Freedom

    @Andrew_J_C:disqus Funny, I thought this article was about federal housing subsidies.. not local zoning changes, so I’m not sure how I could have made her case: eloquently or not.  Perhaps you should re-read the article.

    Also, don’t be a goofball.  I never suggested that the gov’t should guarantee my home value.  What I said is that the government should not change zoning in a SFR, because that undermines the stability of a neighborhood… which can negatively impact home value.

    How dare I insist neighbors cannot use their property in any way they deem appropriate?  They can use it in any way that is consistent with local laws and zoning ordinances. 

    Should your next door neighbor be able to open a home auto repair business.. with multiple partially disassembled autos in his yard?  Clanking with air wrenches day and night?  Spraying WD-40, storing motor oil, etc just on his side of your shared property line?  Customers coming and going whenever?  What if this use was what your neighbor deemed appropriate for his property?

  • fred

    Nothing is going to convince True Freedom that he doesn’t have a god-given right to keep his SFH neighborhood eternally the same. Nimbyism is a hard habit to break.

  • Anonymous

    @eafdb538126573d539fbcf7bf3b2d4cf:disqus I’m not some central planner who wants to force density or mixed-use on people. I don’t claim to know what the best arrangement of land uses is. I don’t have a vision for your neighborhood. I want less zoning, that covers real public safety concerns (which would address the pollution from your auto shop or chemical plant examples).

    On the other hand, the people who favor restrictive zoning do like central planning. They do claim to know what the best arrangement of land uses is, and they do have a vision for the neighborhood.

    If you and your neighbors in your homeowners’ association all like living in a homogeneous SFR neighborhood, then you don’t (or shouldn’t) need zoning to protect you. If none of you want to change the land use, no one should be forcing you to do so. Zoning exists so that if one of your neighbors wants to change the land use, you can stop them. Zoning exists because not everyone agrees on land use. It exists to allow a majority (or a vocal minority) to enforce its will on others.

    The fact that modern urban development projects are done by large, politically connected developers is not a reason for zoning. It is an outcome of zoning, because it is impossible to get anything done without doing favors for the powers that be. This was highlighted perfectly in a recent article on LA Curbed, where leaked documents revealed that neighborhood associations are basically shaking down developers for bribes in exchange for the promise to not file lawsuits.

    On the issue of investment… the government giveth, and the government taketh away. For example, consider Cheviot Hills, because I like to pick on them. This area was built as an SFR neighborhood in between the 20s and 50s. It probably wouldn’t have been possible if the city hadn’t spent a lot of money building the Los Angeles Aqueduct in 1913. Since then, the government has built the 10 freeway, which made commuting from Cheviot Hills to downtown much easier. That raised property values. Now the government is building the Expo Line, which will also increase property values. Taxpayers all over LA County, the State of California, and country have paid for improvements that raised the value of the property in Cheviot Hills. To look at property value as an exogenous value to which the residents who happened to be there when zoning was created have an inalienable right is just ridiculous.

  • True Freedom

    @Andrew_J_C:disqus @northendmatt:disqus not sure if y’all are still around, but I’m guessing y’all wouldn’t have any problem with this kind of development as well?
    http://www.latimes.com/news/local/la-me-holland-teardown-20130118,0,1152134.story

  • Yes, Federal government invested lots of money in American real estate market. This involvement of federal government will help people to purchase the property easily.

  • Agree with that, the federal policy makers should set goals to ensure all the taxpayers get beneficial returns on their real estate investment.

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