Lots of e-mail continues to roll in on this one.
How much overinvestment in housing follows from government subsidies to home owners? What I want to know it, how big a problem is this really?
Economist Edwin Mills estimated back in 1987 that, through 1986, the U.S. housing stock was 30 percent larger than would have been the case without subsidies and — get this — that U.S. income was 10 percent lower as a consequence (unfortunately, Mills’s paper is not available online, but those of you with access to a library will want to look for “Has the United States Overinvested in Housing?” Journal of the American Real Estate and Urban Economics Association, Vol. 15, Spring 1987, pp. 601-616).
Economist Lori Taylor (no relation) contends that policy changes since 1986 have not changed anything that would bear on Mills’s analysis and that the positive externalities associated with housing would have to be $220 billion per year — or $300 per month for each and every private home in the United States — for those subsidies to be economically defensible. Economists Edward Glaeser and Jesse Shapiro do not believe that the evidence supports the contention that the positive externalities of home ownership are anything like that. Even were the positive externalities sufficient to justify the costs identified by Taylor, Glaeser and Shapiro contend that the home-mortgage interest deduction (the main but by no means the only subsidy available to home buyers) does not expand home ownership by very much — it simply provides wealth transfers to already-wealthy home owners.