US obsession with owning homes has gone too far

July 30, 2008
US obsession with owning homes has gone too far
By ROBERT SAMUELSON

THE real lessons of America's housing crisis have gotten lost. It's
portrayed as the financial system run amok; the housing market became
a casino. The remedy is to enact rules that prevent a repetition. All
this is partly true. But it ignores a larger truth: our infatuation
with homeownership, embedded in dozens of government policies, has
turned housing into something of a National Nightmare.

As a society, we're overinvesting in real estate. We build too many
McMansions. They use too much energy, and their carrying costs absorb
too much of Americans' incomes. We think everyone should become a
homeowner, when many families can't or shouldn't. The result is to
encourage lending to weak borrowers who are likely to default. The
avid pursuit of a few more percentage points on the homeownership
rate (it rose from 64 per cent of households in 1994 to 69 per cent
in 2005) has condoned enormously damaging policies.

Does every house need a 'home entertainment centre'? Well, no. But
when you subsidise something, you get more of it than you otherwise
would. That's our housing policy. Let's count the conspicuous
subsidies. The biggest favour the upper-middle class. Homeowners can
deduct interest on mortgages of up to US$1 million on their taxes;
they can deduct local property taxes; profits from home sales are
mostly shielded from taxes. In 2008, these tax breaks are worth about
US$145 billion. Next, government funnels cheap credit into housing
through Congressionally chartered Fannie Mae and Freddie Mac.
Perceived as being backed by the US Treasury, Fannie and Freddie can
borrow at preferential rates; they now hold or guarantee US$5.2
trillion of mortgages, two-fifths of the total. Finally, the Federal
Housing Administration (FHA) insures mortgages for low- and moderate-
income families that require only a 3 per cent down payment.

Congress' response to the present crisis is, not surprisingly, more
of the same. The legislation enacted last week adds new subsidies to
the old. It creates more tax breaks; most first-time homebuyers could
receive a US$7,500 tax credit. It expands the lending authority of
Fannie Mae and Freddie Mac. Previously, the permanent ceiling on
their mortgages was US$417,000; now that would go as high as
US$625,500. And the FHA would be authorised to support, at much lower
monthly payments, the refinancing of mortgages of an estimated
400,000 homeowners in danger of default.

More subsidies may - or may not - stabilise the housing market in the
short run. But there are long-term hazards. Make no mistake: I'm not
anti-housing. I believe that homeownership strengthens neighbourhoods
and encourages people to maintain their property. It's also true, as
economist Mark Zandi shows in his book Financial Shock, that today's
housing collapse had multiple causes: overconfidence about rising
home prices; cheap credit; lax lending practices; inept government
regulation; speculative fever; sheer fraud.

Still, the government's pro-housing policies contributed in two
crucial ways. First, they raised demand for now suspect 'sub-prime'
mortgages. The Department of Housing and Urban Development
sets 'affordable' housing goals for Fannie Mae and Freddie Mac to
dedicate a given amount of credit to poorer homeowners. One way
Fannie and Freddie fulfilled these goals was to buy sub-prime
mortgage securities - many of which have now gone bad. Second,
government's housing bias created a permissive climate for lax
lending. Both the Clinton and present Bush administrations bragged
about boosting homeownership. Regulators who resisted the agenda
risked being 'roundly criticised', notes Zandi.

Good intentions led to bad outcomes: an old story. Fannie's and
Freddie's losses impelled the Treasury Department to propose a rescue
for the companies; given their size and the government's implicit
backing of their debt, doing otherwise would have risked a financial
panic. Personal savings have been skewed toward housing. Many
Americans approaching retirement 'have accumulated little wealth
outside their homes', concludes a study by economists Annamaria
Lusardi of Dartmouth College and Olivia S Mitchell of the University
of Pennsylvania.

We might curtail housing subsidies without exposing the economy to
the disruption of outright elimination. The mortgage interest
deduction could be converted to a less generous credit; Fannie's and
Freddie's expanded powers could be made temporary; FHA's minimum down
payment could be set at a more sensible 5 per cent. But even these
modest steps would require recognising that the homeownership
obsession has gone too far. It would require a willingness to
confront the huge constituency of homeowners, builders, realtors and
mortgage bankers. There is no sign of either. When tomorrow's housing
crisis occurs, we will probably find its seeds in the 'solution' to
today's.