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.

"The Calculator"

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

In the midst of all the to-ing and fro-ing over Hewlett Packer's boardroom issues, it's nice that yesterday's FT contained a paean to the HP 12-C, on the iconic financial calculator's 30th anniversary. (Handheld device that remains a must-have, Financial Times, 9/22/11)

Sherlock Holmes used to refer to Irene Adler as simply "The Woman."

Readers of a certain age -- who cut their teeth, as I did, on their trusty K&E slide rule, and punching cards in the middle of the night for a mainframe -- will understand why for thousands, the 12-C is still "The Calculator." It's a modest little gadget, roughly the size of a larger smartphone, but it gave us hand-held power and reliability that used to require signing up to a computer services bureau.

I'm an Excel freak now, and rarely turn my calculator on in anger. But for quite a while, anything important in Excel was also checked using my HP 12-C.

One morning a decade ago, I found that I had dropped my beloved 12-C under my equally beloved La-Z-Boy the previous evening; and some heavy rocking had put a deep curve in the case. To my astonishment, when I turned the deformed unit on, except for a switch to European notation (which wouldn't turn off), everything else continued to work. My trusty 12-C gave two more years of service, before the battery died and the twisted case made it impossible to change the battery.

With regret, I replaced it with a HP 17-BII. Why? Because many students couldn't follow my examples while using Reverse Polish Notation. (If you know what RPN is, you also know that to know RPN is to love it).

The 17-B can switch from RPN to "regular" algebraic logic, so I can help students one minute and go back to RPN the next.

But it's not the same. I'll bet HP's beleaguered stock gets a little pop this month from a few thousand of us giving into our nostalgia and buying another 12C.

Real Estate Research Spans Our Campus

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

One of the defining characteristics of the University of Wisconsin is the breadth of scholarship and teaching across the campus. For example, we teach more foreign languages (more than 80!) than any other university in the world. In previous posts, we talked about the new Discovery Institutes, a public-private partnership that brings together researchers from across campus to work on a range of problems such as epigenetics (how genes are activated or inactivated), tissue engineering (using artificial structures called “scaffolds” to grow cells into substitutes for biological material – maybe that piece of my knee I lost in a long-ago basketball game), improvements in therapeutic technologies, the application of recent advances in the mathematics of optimization to biology and medicine, and a broad look at the “systems level” of biological organisms.

The Graaskamp Center and its associated faculty are in the thick of intellectual ferment in our field, both inside and outside the University. Within UW, our faculty have their academic homes in the Wisconsin School of Business, but our faculty also have formal affiliations with other UW organizations, including Economics, Urban and Regional Planning, the Institute for Research on Poverty, World Affairs and the Global Economy (WAGE), and the Law School, to name a few. In turn, selected faculty from these and other units serve as Faculty Fellows of the Graaskamp Center. Among their many contributions, these colleagues often speak at our events such as the twice-annual meetings of our Board of Advisors and the Wisconsin Real Estate and Economic Outlook Conference.

We’re very fortunate that we can also leverage off each other’s research. Some years ago, Richard Green (then on our faculty) and Michelle White wrote an influential paper “Measuring the Benefits of Homeownership: Effects on Children,” that kicked off a renewed interest among housing economists in the connections between housing markets and social outcomes. More recently, housing economists in the Graaskamp Center have been focused on the connections between unemployment and the economic well-being of families, and our recent problems in the housing market, for example the development of the Wisconsin Foreclosure and Unemployment Relief Plan (WI-FUR).

Thus, we’re very pleased to see a new Wisconsin research initiative on the connections between housing and the long-term health and well-being of children, families and communities from our colleagues at the Institute for Research on Poverty:

FOUNDATION FUNDS HOUSING RESEARCH OF THREE UW-MADISON FACULTY MEMBERS

Three researchers with the Institute for Research on Poverty at the University of Wisconsin-Madison Timothy Smeeding, Lawrence Berger and J. Michael Collins, have received support from the John D. and Catherine T. MacArthur Foundation to explore the role housing plays in the long-term health and well-being of children, families and communities.

Their main thesis is that income benefit policies are also housing stability policies that help families maintain payments for mortgages and rent and therefore avoid forced housing changes. The goal of their research is to identify the most effective policies for avoiding the negative impacts of housing changes on family well-being.

We’re looking forward to learning from this research as it comes online. Read the full press release from UW-Madison News.

Breaking the cycle in France

Professor François Ortalo-Magné is member of the council of economic advisors to the French ministry in charge of land use and housing policy, among its many mandates (Economic Council for Sustainable Development, Ministry of the Ecology, Sustainable Development, Transports and Housing). At its latest meeting, on Monday February 14th, the council discussed the current taxation of land in France and opportunities to improve the system.

To move the debate forward, Ortalo-Magné presented key ideas from his latest research paper on the political economy of urban growth (pdf download). He and co-author Professor Andrea Prat (London School of Economics) highlight a major flaw in the design of housing policy in many countries including the U.S. and France: “Both countries promote housing affordability for all and homeownership for most. Andrea and I find that these two objectives are not compatible when local voters get to decide on local urban growth, as happens in the U.S. and France,” says Ortalo-Magné.

When homeownership is subsidized, voters are encouraged to own more housing. Because they own more housing, they lose more if local housing supply increases given the same level of demand. Therefore they have an incentive to vote against urban growth. In their research, Ortalo-Magné and Prat demonstrate how vicious cycles may emerge whereby voters invest in housing because they expect the voting process to protect their investment, and they vote to protect their investment because they invested a lot. As a result, a city may remain smaller than what voters would have preferred had they been asked to vote together, before they bought any housing.

To break this cycle, Ortalo-Magné proposes that homeownership subsidies in France be greater in cities that commit to increase local supply. “Short of blocking the latest round of first-time buyer subsidies, introducing a bit of conditionality in the subsidies is a step in the right direction to break the type of vicious cycle Andrea Prat and I identify in our research. Maybe in the future, local communities won’t be eligible for any subsidies unless they also release some supply. That would help!”