The Cost Of Promoting Home Ownership

by Stuart Shapiro

Home ownership is seen as part of the American Dream. The U.S. government goes to great lengths to promote it (including the mortgage interest deduction).  New research, however, shows that this may be a bad idea:

The costs of excessive home ownership, however, go even further. The promotion of such ownership is fundamentally regressive. It perpetuates inherited wealth and subsidies of middle-class children. The accumulation of housing wealth benefits those simply lucky enough to have had grandparents who were homeowners. Any policies to promote younger people “getting on the property ladder” will disproportionately benefit those fortunate children who have been given savings, have parental co-signers, and can show stable prior residency. They come at the cost of spending that money elsewhere, say on housing credits for the poor. They also perpetuate an influential lobby to protect mortgage debt and housing assets from taxes, whether while living in the asset or passing it on to family members. Like all favoritism to the children of the relatively rich, this discourages the development of new talent and competition, and thus is economically harmful.

Home ownership also directly discourages economic flexibility. In new research, my colleague David Blanchflower and Andrew Oswald of Warwick University have found that rises in the home-ownership rate in a US state are a precursor to eventual greater rises in unemployment. Home ownership damages employment through three powerful channels: decreasing levels of labor mobility, increasing commuting times, and diminishing creation of businesses. Their evidence suggests that the housing market can produce negative “externalities” on the labor market.

Of course, in a free society, people who want to own homes and have the means should be able to purchase them, just as they would any other luxury item. But our governments do not need to subsidize that purchase.

This is an issue where I agree with my libertarian friends.  If people want to own their own houses fine, but let’s not use taxpayer dollars to encourage it.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.