Do We Need to Subsidize Homeownership to Preserve Our National Identity?

Government efforts to subsidize homeownership helped cause or at least exacerbate the financial crisis, and left taxpayers on the hook for hundreds of billions of dollars in liability for dubious mortgages. In this recent New York Times op ed, Yale economist Robert Shiller, a leading expert on housing markets, concedes that such subsidies have little economic justification, but argues that we need to maintain them to preserve America’s “national identity”:

For decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs. …

But consider what will happen once the economy is again operating at full capacity. Basic economics tells us that when Americans, over all, spend more on housing, they must ultimately spend less on something else. Why should housing consumption be better than other consumption, or investments that people might choose?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

Shiller is an outstanding scholar. But this particular argument of his seems weak. Even if Americans have traditionally believed that “owning homes in healthy communities is connected to individual liberties,” that belief may be wrong. Shiller himself points to Switzerland as an example of a society where the homeownership rate is only half of ours (34.6% versus 66%). Switzerland is a clearly a relatively free society and a highly successful one. I also don’t buy the admittedly common view that having a landlord is necessarily “oppressive.” In most parts of the country, the rental market is highly competitive, with hundreds or thousands of landlords competing for renters’ business. An “oppressive” landlord would quickly lose customers to his rivals, or have to charge very low rent to compensate for the inconvenience he imposes. And it’s usually easier to dump a bad landlord than a bad house that you own.

Even if we somehow couldn’t maintain our freedom and cultural identity if our homeownership rate were as low as that of the Swiss, it doesn’t follow that we would suffer any great harm from the kinds of reductions in ownership rates that could realistically be expected if government subsidies were eliminated. I don’t see any reason why an America with a homeownership rate of 56% or even 46% would be significantly worse than the one that exists now. In practice, cutting out government subsidies may not even reduce the rate that far. As Shiller himself points out (without recognizing the way it contradicts his broader argument), cutting back on subsidies would probably cause home prices to fall:

America isn’t Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs, often with distinct features. If many of these homes needed to be converted to rental units, home prices might well drop. [emphasis added]

If home prices drop, homes will become more affordable, and more people will be able to buy them – without the kinds of dubious mortgages that imperil the financial system and leave taxpayers on the hook for hundreds of billions of dollars in bailouts. That’s the upside of falling home prices.

I doubt that we really need massive government homeownership subsidies to maintain America’s national identity. But if we do, I see it as a defect of our character not a virtue. A nation like that should consider a good twelve step program; and its government should stop playing the role of enabler. As F.A. Hayek put it, “[i]t is no real argument to say that an idea is un-American, or un-German, nor is a mistaken or vicious ideal better for having been conceived by one of our compatriots.”

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