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73 abolishing the tax advantage from owning would

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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
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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.
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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.
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