Edward Gleaser on Housing Subsidies
They were a bad idea before this mess, and they are a bad idea now.
America’s housing woes are, in part, the legacy of government policies that pushed consumers to borrow and banks to lend. The home mortgage interest deduction encouraged people to make leveraged bets on housing, which looks silly today amidst the wreckage of over-hyped housing markets. Since the New Deal, the federal government has thought that it was a nifty idea to use its borrowing power to encourage home buying through government-sponsored agencies like Fannie Mae and Freddie Mac. The political beauty of such policies was that they subsidized borrowing and buying in a way that could be kept off the balance sheet. For years, policy makers maintained the fiction that Freddie and Fannie didn’t cost taxpayers anything.
One of the clearest lessons of the past year is that these lending policies are anything but cheap. To get banks to lend at below-market rates, the government must insure mortgages against default. When those mortgages do default, as they have in droves over the past two years, taxpayers are on the hook. Ordinary taxpayers are currently facing the prospect of paying for the last rash of government-subsidized lending. No one should be thrilled at the idea of a new government guarantee program that makes us liable for billions, or trillions, of dollars of new, bad mortgages.
Moreover, any benefits from a new round of subsidized lending are likely to be small. Over the past 25 years, when interest rates fell by 1 percent, housing prices increased by 4.6 percent. If this historical relationship continues to hold, the proposed plan would increase prices by about 5.25 percent. This modest increase would be barely noticeable at the epicenters of the housing bust where prices have fallen by over 30 percent. In many of those areas, like Las Vegas and Phoenix, land is cheap and building is unrestricted, and no credit market intervention in the world will keep housing prices permanently above the costs of supplying homes.
In fact, the government shouldn’t really be in the business of making housing more expensive at all. Price supports are usually a bad idea, because they distort supply decisions and redistribute from buyers to sellers. Why, exactly, should the government be encouraging more overbuilding in Las Vegas? Why, in an age of global warming, should the government subsidize more McMansions? Some economists argue that price supports are needed because prices are below fundamentals, but prices today remain significantly higher than either historical norms or supply costs.