From the inbox:
Given that there are a number of substantial federal subsidies on the books now, what would be the consequences of such a policy [eliminating federal housing subsidies] in the midst of our current predicament?
1. What would be the consequences for current home owners’ payments if you eliminated tax deduction of interest on mortgages?
2. What would be the consequences for housing prices if purchasers could not deduct mortgage interest?
3. What would be the consequence for banks receiving payments if owners were not able to deduct mortgage interest? And then for the investors in those mortgages and banks?
Transitions have costs. I’m curious what you think the costs of the transition away from this federal housing subsidy would be, what the gains would be, and whether the gains would be worth the costs.
1. Without the deduction, taxes paid by homeowners would go up. If we taxed imputed rent (as economists recommend in a “perfect world” where tax policy is neutral with regards to home ownership), taxes paid by homeowners go WAY up.
2. Housing prices would decline in the short-term because demand for housing would be substantially reduced, but supply would not likewise drop so quickly. Over time, once the supply of housing adjusts to this reduced demand, prices would, however, recover and probably not differ much relative to where they are at present.
3. Increased financial burdens on existing homeowners would likely mean more delinquencies and foreclosures. Investors in housing would thus be worse off.
Yes, transitions have costs, and transition costs in this case would be large. That tells you (i) why it will not happen; lots of the most likely voters in America would suddenly become poorer as a consequence (at least in the immediate term), and (ii) how much damage the current regime does to the overall health of the economy; hundreds of billions of dollars would fly elsewhere in a nanosecond — where they could be more profitably engaged — if government set those dollars free. Few economists would argue with the proposition that there would be substantially more wealth creation in the U.S. economy if we could somehow figure out a way to end these subsidies.
Now, one might argue that now is not the time to undertake such a policy reform, but, at the very least, Republicans might want to think twice about increasing housing subsidies and making matters even worse. Unfortunately, it has probably never even occurred to self-proclaimed conservative House Republicans that the housing subsidies they champion are directly at odds with their limited-government rhetoric.
For what it is worth, Switzerland is the only major country I am aware of that does not implicitly or explicitly subsidize housing in any substantial manner. Home ownership rates are somewhere around 35% as a consequence. But no one thinks of Switzerland as poor or deprived somehow because it does not receive the positive externalities allegedly associated with private home ownership.