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.