The financial crisis of 2008 laid bare the over dependence of the US economy on housing. Since the New Deal, conventional political wisdom has been that housing needs to be subsidized and supported. Why isn’t this almost religious economic tenet ever questioned? Is governmental support of housing irrational?
Knee Jerk Response to Crisis: Reflate Housing
Nobel Prize winning economist and New York Times columnist Paul Krugman has long advocated governmental support for housing to the point where his automatic response to a financial crisis it to re-ignite the housing bubble. During the financial crisis, I wrote to Prof. Krugman, asking whether or not over reliance on the housing market was economically foolish. I received no response from Professor Krugman nor did I expect one. It appears that focusing on America’s over investment in housing is too threatening for many in our political and intellectual establishment. The Obama administration is now pursing reflating housing prices with a vengeance.
Housing as a Consumer Good
Houses are an expensive consumer item and a depreciating asset. Buying a house has high transactional costs associated with it: brokerage fees, title searches, mortgage fees, appraisal fees, attorney’s fees, surveys, engineering inspections, pest control inspections, radon testing, etc. For most Americans, buying a home also means taking on a staggering amount of debt. In the Northeastern US, where I live, it is not uncommon for a modest home to be a million dollars or more. In the heyday of the housing boom, that could mean a $900,000 to a million dollar mortgage. When I was growing up in the 60s that amount of money could buy a fair sized business supporting 30-40 employees. Support for home ownership is at best a short term boost to the economy.
Houses also need to be maintained. The average suburban homeowner, who commutes some distance to a city, has little time to maintain a home; so add on expenditures for gardeners, roofers, heating and cooling maintenance and repair, pool maintenance, gutter clearing, tree surgeons, plumbers, cabinet makers, carpenters, etc. The list is almost endless. Before I purchased a home, I asked a long-time homeowner how much of my disposable income would be consumed in maintaining a house. The answer was 110% of it.
Suburban houses are energy inefficient compared to city based, multi-family dwellings. Heating and cooling costs are high, lawns need to be fertilized and fertilizer has a large carbon footprint. Moreover, suburban houses require multiple vehicles and constant driving for commuting and basic shopping. As more subdivisions are built, roads, utility lines and municipal services are extended at great economic cost, also increasing real estate taxes. Plus, the average house size has soared over the last 25 years requiring greater expenditures on furniture, carpeting and appliances.
Politics and Economics Collide
A symbiotic relationship has developed among builders, realtors, politicians and the financial industry which fuels the perpetual motion housing machine. Homeowners receive tax breaks in the form of deductions for mortgage interest and real estate taxes. In addition, many homeowners are eligible for subsidized mortgages through veterans’ programs, Fanny and Freddy and their progeny.
Initially, these subsidies had the desired effect of increasing home ownership and house prices. This, in turn, encouraged homeowners to tap the ever increasing equity through second mortgages, home equity lines and reverse mortgages. This “virtuous” and pernicious cycle made bankers, real estate agents, attorneys, appraisers, kitchen remodelers and others feel rich. Homeowners felt rich enough to no longer feel a need to save. Homes became a virtual ATM. And if one home was great, why not buy a second or third home, or perhaps invest in another home for a quick purchase and resale. All went well until the merry go round stopped in 2008 and the cycle went into reverse with foreclosures, evictions and bankruptcy.
The Perfect Storm
For the homeowner we have the perfect storm: too much net worth committed to housing, too little savings, declining prices, declining incomes and unemployment and rising home ownership costs. Houses are also an illiquid asset. Stocks can be sold with a click of your computer, not so with houses.
Where are We Now?
Intellectually, we have not moved beyond the New Deal construct, updated by the Bush and Obama Administrations; that is, we are going to make this an “ownership society.” The knee jerk response of the Treasury and the Federal Reserve is to lower interest rates, pump liquidity into banks and lower lending standards through federal programs and see if we can breathe air into the housing bubble.
How Can We Change Course?
The housing boom was a massive misallocation of society’s scarce economic resources. The government should not be in the business of subsidizing housing. For that matter the government should not be in the business of subsidizing any industry. The government should not subsidize: housing, airlines, autos, refrigerators or farm crops. The million dollar mortgage would be better invested in a productive business which would produce something of more lasting value. Housing is an adjunct to a productive society, not an end in itself. The government should not be propounding the myth of home ownership as a metaphor for personal validation and certainly not as a means of wealth accumulation. What the government should be propounding is thrift, hard work, and housing, whether rented or owned, that citizens can afford.
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Tags: Bus, house prices, housing, irrational policy, New Deal, Obama, Paul Krugman, subsidies
