73 abolishing the tax advantage from owning would

Info icon This preview shows pages 130–133. Sign up to view the full content.

View Full Document Right Arrow Icon
73 Abolishing the tax advantage from owning would benefit everyone somewhat (in the long-run) because it would lead to a larger business capital stock (and possibly
Image of page 130

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
129 more social infrastructure and more human capital) and a smaller housing capital stock, which would positively affect economic growth. More recent work by Poterba and Sinai (2008) estimates that the benefits from the home mortgage interest deduction for the average home- owning household that earns between $40,000 and $75,000 are one-tenth of the benefits that accrue to the average home-owning household earning more than $250,000. 74 The current policies do not discriminate between first-time home purchasers and households simply wanting to buy larger houses or (for the GSE subsidies) even second homes. Rather, the policies promote larger home purchases. Census data show that the square footage of new houses grew by about 50% between the mid 1970s and the mid 2000s. Although some of this increase surely reflected growing household incomes, some of the increase also surely reflected the growing value of the subsidy advantages for buying larger houses. Similarly, studies show that U.S. home sizes are substantially above those in Western European countries that have similar or only slightly lower household incomes – and that even the home size of lower- income owner-occupiers in the U.S. are well above the averages for Western Europe. Finally, the deduction encourages people to borrow as much as possible. Encouraging household leverage does not strike us as the best possible policy. Thus, ironically, although one of the motives for encouraging home ownership was to provide households with a means of building wealth, the process of making borrowing cheap and easy encouraged these households to borrow excessively, and then to borrow again if interest rates declined and/or their house value increased. In the process, they reduce the amount of net equity that they might otherwise build in their home. The metaphor of the refinancing household’s using their home as an ATM to finance consumption was a strong one in the mid 2000s. And, of course, the excessive leverage and the cashing out of equity meant that the declines in housing prices after mid 2006 caused more houses to be “underwater”, where the value of the house was less than the outstanding principal on the enlarged mortgage. And, in turn, this meant more instances where households defaulted on their mortgages. There is no social purpose that is served by such “more house” investments – a fifth bedroom rather than four, a fourth bathroom rather than three, a half acre of land rather than a third of an acre – and no social purpose that is served by excessive leverage.
Image of page 131
130 In sum, in addition to reducing the overall size of the pie, the policy of fighting income inequality by subsidizing home ownership redistributes the pie to the wrong people. Clearly, the housing policy of the past is misguided, and there is an urgent need to think of more effective ways to halt the increase in income inequality.
Image of page 132

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 133
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern