Let homebuyer tax credit die
Posted
Sep 25 2009, 10:04 AM
by
Minyanville
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This article is written by Minyanville's Ryan Goldberg
Home sales fell last month, and so be it. Every home that doesn’t get sold is another bailout I don’t have to finance. (See "Home sales drying up.")
Congress included an $8,000 tax credit for first-time homebuyers as part of the stimulus package passed last winter. As many as 40% of all homebuyers this year will qualify for it, and it’s expected to cost the government $15 billion -- more than twice the original forecast -- thanks to its popularity.
Bing: More about the homebuyer tax credit
The tax credit is scheduled to expire on Nov. 30. Not surprisingly, the real estate industry, including the 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer, and to expand it to $15,000 and allow all buyers to qualify. The cost: $50 billion to $100 billion.
This is a redistributed tax from renters to buyers. As a proud renter, I’ve had enough. I didn’t flip houses as investments, nor did I buy one I couldn’t afford. So why must I pay for others to speculate and swim in risk?
For too long the American religion of home-ownership has cast its spell on our society and packed the pews of Congress. “Owning a home lies at the heart of the American dream,” President Bush declared in 2002. But look where that dream has led us: subprime housing and unsustainable suburbanization and near-depression. (See "Three post-bubble homebuyer strategies.")
Considering its role in fostering the economic collapse, providing tax credits to prop up the housing system is sort of like offering a recovering addict his drug of choice. What’s more, with Fannie Mae (FNM), Freddie Mac (FRE), Ginnie Mae, and the FHA involved in 85% of all mortgages, renters -- as well as everyone else -- are paying to prop up real estate prices. To top it off, the Fed has its $1.45 trillion mortgage purchase plan.
The Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, called the original tax credit one of the worst provisions of the stimulus package, saying the money was a give-away for people who would buy a house anyway. It believes extending the credit to all buyers is even worse. I'm tired of subsidizing homeownership. The idea that it has some intrinsic value is a myth. It's viewed as essential to the American dream only because the government has institutionalized the tax benefits of buying a house. It shouldn’t be, as politicians make it sound, the true path to righteousness.
How about this idea for a capitalist society: Allow buying a house to stand on its own merits -- especially since those merits are trumpeted by politicians as intrinsic -- instead of stacking the deck in its favor.
Home ownership wasn't always considered a fundamental right. Before the Great Depression, a minority of Americans owned a home. Government policies changed that: In the 1930s and ‘40s came longer-term mortgages and Fannie Mae to purchase the mortgages and grease the system. The tax deduction on mortgage-interest payments elevated house purchases above renting. Between 1940 and 1960, the home ownership rate rose from 44 percent to 62 percent.
For the last decade, new financial innovations like adjustable-rate mortgages and securitized subprime loans were new ammunition for home ownership. By 2004, a record 69.2% of all American families owned their home. It was an illusion though. These government policies favoring home ownership set the climate in which the housing boom grew like a tsunami and then destroyed everything around it.
In a recent Atlantic Monthly article, Richard Florida, an urban studies theorist and author of the best-selling The Rise of the Creative Class, wrote that a big way to fix the economy “begins with the removal of home ownership from its long-privileged place at the center of the U.S. economy." He said "Substantial incentives for home ownership (from tax breaks to artificially low mortgage interest rates) distort demand, encouraging people to buy bigger houses than they otherwise would."
“If anything,” he continued, “our government policies should encourage renting, not buying.”
Home ownership is itself not a public good, no more honorable than renting. In his article, Florida mentioned a recent study by Grace Wong, an economist at the Wharton School of Business, which shows that, controlling for income and demographics, homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.
We live in a world that requires mobility, yet home ownership is like an Ace bandage on it. People who own their homes are often reluctant to leave distressed areas or move for new jobs. Economists have showed that places with higher home ownership in both the United States and Europe also suffer from higher unemployment. (Think of Detroit.) Home ownership, according to economist Andrew Oswald, is a greater predictor of unemployment than rates of unionization or the size of welfare benefits.
As a renter, I still hear from people who say buying a home is a great investment. But, in light of what has happened the last two years, I cringe at that idea. And I'm sure others agree: From 2005 through 2007 alone, at the peak of the housing bubble, more than 22 million Americans bought either new or existing houses on the same advice. As we've seen with millions of foreclosures, those houses sunk their American dream.
No positions in stocks mentioned.
Image credit: respres, Creative Commons Attribution 2.0 license
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