U.S. Housing Policy is Ineffective and Expensive

by Morris A. Davis, Associate Professor of Real Estate at the Wisconsin School of Business and Academic Director of the Graaskamp Center

For decades U.S. housing policy has focused on promoting homeownership. But has the policy worked? Is it a worthwhile policy goal? And what does it cost U.S. taxpayers?  My analysis, published by the Cato Institute, looks at these important questions.

The federal government touts the benefits of homeownership and uses two major policy instruments to encourage Americans to buy rather than rent a home. The tax code subsidizes the cost of homeownership through the mortgage interest tax deduction. In addition, the federal government reduces the cost of mortgage interest by insuring the principal on mortgages purchased by the Federal Housing Authority and by guaranteeing the debt of government-sponsored enterprises Fannie Mae and Freddie Mac.

The stated goal of these government interventions is to enable more Americans buy a home. But that goal has not been achieved.  The homeownership rate has been roughly constant since 1970.  Federal policy has been ineffective because the mortgage interest tax deduction is a subsidy to people with above-median incomes.  These people should have no trouble buying a home.  The presence of Fannie Mae and Freddie Mac has not boosted homeownership rates because Fannie Mae and Freddie Mac have had a trivial impact on mortgage rates, and in general mortgage rates appear to be only loosely connected to homeownership.

Should the federal government actively try to encourage homeownership? According to the U.S. Department of Housing and Urban Development, homeownership benefits families by offering greater financial security and more stable living environments, and benefits the overall population by helping to generate stronger communities and economic growth. My analysis calls these points into question. For example, for many people housing is not necessarily the right way to build wealth because it is a risky asset.  As many homeowners have experienced recently, house prices can fall quite significantly.  Furthermore, while homeownership is correlated with neighborhood stability, it has been difficult to establish that homeownership causes stability. Finally, international data show that homeownership does not lead to higher standards of living. Some relatively poor countries like Greece and Mexico have higher rates of homeownership than the U.S. while some relatively wealthy countries such as Denmark and Switzerland have lower rates. The overall correlation of homeownership rates and standards of living is just about zero.

Finally, my analysis found that U.S. policies aimed at making homeownership more affordable are, in addition to being ineffective and of questionable worth, tremendously expensive.

I estimate that the net present value of the cost of these two federal housing policies is around $2.5 trillion. Given the hefty price tag and weak justification, is the promotion of homeownership a desirable public policy goal? It is time to reconsider.

Housing-Urban-Labor-Macro (HULM) conference explores causes and consequences of the housing crisis

The University of Wisconsin-Madison has long been known as a leader in research, including cutting-edge explorations of housing and economic issues conducted by the UW-Madison real estate faculty. Compelling real-life problems challenge these leading academics to find unique solutions for improving our urban environment worldwide.

In March, the UW real estate faculty joined their peers in sharing the findings of their research at the sixth Housing-Urban-Labor-Macro (HULM) Conference, held at the Federal Reserve Bank of Boston. This biannual conference was first held in the fall of 2009 and is now well known for facilitating the presentation and discussion of some of the most impressive real estate and urban research conducted by leading academics from around the world.

"We organized the first HULM conference in an effort to create a new venue for the rapidly growing field of real estate research," says Professor and Graaskamp Center Academic Director Morris A. Davis. "Our partnerships with the Federal Reserve Banks in Atlanta, Chicago and St. Louis have helped us widen our audience and bring this research to the people who will benefit the most from it."

The spring 2012 HULM conference was organized by Professor Erwan Quintin, a former senior economist and policy advisor at the Federal Reserve Bank of Dallas. "A unique aspect of this event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses," says Quintin. "This includes not only Federal Reserve economists but also researchers from government-sponsored agencies."

As has been the case for most HULM meetings to date, the causes and consequences of the foreclosure boom emerged as the dominant question at the Boston Fed event. Among other presenters, Kyle Herkenhoff discussed the effect of foreclosure delays on the length of unemployment spells, while Paul Willen proposed a new and improved way to measure the effect of foreclosed properties on the value of neighboring homes.

Stijn Van Nieuwerburgh, for his part, argued that the deterioration of underwriting standards is the most likely explanation for the recent boom-bust cycle in home prices. That presentation prompted a very lively debate on what caused this deterioration in the first place. Two possible explanations are a regulatory environment more tolerant of risky mortgages around the turn of the century and the effects of increased demand for the investment grade paper created via mortgage securitization.

Urban economics questions also received their fair share of attention, with several presentations devoted to explaining why observationally similar people tend to earn very different amounts in different cities. Gilles Duranton, for his part, discussed a new approach to measure the speed with which urban costs rise with city size.

At the end of the two-day conference, Quintin says he feels the goals of presentation and collaboration were well met.

"HULM is a unique opportunity for economists around the world who study real estate questions to exchange and debate ideas," Quintin says. "Research ideas are born or become more mature at HULM, new co-authorships are formed, and new policy proposals emerge." Davis echoes this sentiment, saying, "When you have 40 people in a room that are all experts, we are able to learn from listening to what people we don't typically interact with have to say."

The next installment of the conference will take place at the Federal Reserve Bank of Chicago on October 5-6, 2012.