Let’s Kill This Housing Subsidy

Let's Kill This Housing Subsidy

By VAHAN JANJIGIAN, Posted: November 04, 2010

Type Size:

Yet even though housing prices across the nation have fallen 30 percent on average from their peaks, they remain almost 50 percent higher than at the turn of this century.

A number of factors contributed to the bubble in the housing market. Aggressive real estate agents and unscrupulous mortgage lenders and brokers must take their share of the blame, but so too must the government. Many politicians are convinced that home ownership is a noble cause and good public policy. Like baseball, hot dogs, and apple pie, owning a house is part of the American dream. More than a few politicians pressured Fannie Mae and Freddie Mac to make more money available to potential buyers who didn’t qualify for a mortgage under long-standing industry standards. Furthermore, the government indirectly encourages higher income folks to buy bigger and more expensive homes by offering them a generous tax deduction.

The home mortgage tax deduction has become entrenched in our economic system. It is so sacrosanct that any politician who suggests we get rid of it stands a better chance of beating Usain Bolt in a 100-meter dash than he does of being reelected to office. Yet killing this housing-bubble creator is exactly what we should do.

Don’t get me wrong. I’m all for lower taxes. I’m also in favor of letting people pursue their dreams. If buying a house is your dream, I say go for it. Just don’t ask the rest of us taxpayers to pay for a good portion of your decision. Taxpayers don’t subsidize hot dog lovers. Why should we subsidize home buyers?

In effect, the home mortgage deduction reduces the cost of borrowing, making it easier for home buyers to reach beyond their means. By allowing buyers to deduct the interest payments, the government makes it easier for home builders and home sellers to command higher prices, thereby contributing to housing bubbles at taxpayers’ expense.

Who benefits most from this generous subsidy? Higher income folks who are fairly well off. After all, to qualify for this deduction you must have enough income to itemize expenses on your tax return. The higher your tax bracket, the greater the value of the deduction. A 5 percent mortgage effectively costs 4 percent for a borrower in the 20 percent tax bracket, but just 3 percent for those in the 40 percent bracket. In effect, the government is forcing taxpayers to subsidize the purchase of bigger and more expensive homes for people who would probably buy a house anyway, with or without a tax deduction.

It’s high time we stop favoring the housing industry over everything else. Let the new Congress simplify our tax code by killing this subsidy and reducing top marginal tax rates across the board.

Click here to visit the Business Buzz home page.

According to the S&P/Case-Shiller Home Price Index, U.S. housing prices peaked in the summer of 2006. In just six-and-a-half years, the average price of a single-family home had more than doubled, making housing one of the best investments during that period. Since then, of course, prices have fallen dramatically. Many homeowners who bought at or near the peak are now underwater, meaning they owe more on their mortgages than their houses are currently worth. Yet even though housing prices across the nation have fallen 30 percent on average from their peaks, they remain almost 50 percent higher than at the turn of this century. A number of factors contributed to the bubble in the housing market. Aggressive real estate agents and unscrupulous mortgage lenders and brokers must take their share of the blame, but so too must the government. Many politicians are convinced that home ownership is a noble cause and good public policy. Like baseball, hot dogs, and apple pie, owning a house is part of the American dream. More than a few politicians pressured Fannie Mae and Freddie Mac to make more money available to potential buyers who didn’t qualify for a mortgage under long-standing industry standards. Furthermore, the government indirectly encourages higher income folks to buy bigger and more expensive homes by offering them a generous tax deduction. The home mortgage tax deduction has become entrenched in our economic system. It is so sacrosanct that any politician who suggests we get rid of it stands a better chance of beating Usain Bolt in a 100-meter dash than he does of being reelected to office. Yet killing this housing-bubble creator is exactly what we should do. Don’t get me wrong. I’m all for lower taxes. I’m also in favor of letting people pursue their dreams. If buying a house is your dream, I say go for it. Just don’t ask the rest of us taxpayers to pay for a good portion of your decision. Taxpayers don’t subsidize hot dog lovers. Why should we subsidize home buyers? In effect, the home mortgage deduction reduces the cost of borrowing, making it easier for home buyers to reach beyond their means. By allowing buyers to deduct the interest payments, the government makes it easier for home builders and home sellers to command higher prices, thereby contributing to housing bubbles at taxpayers’ expense. Who benefits most from this generous subsidy? Higher income folks who are fairly well off. After all, to qualify for this deduction you must have enough income to itemize expenses on your tax return. The higher your tax bracket, the greater the value of the deduction. A 5 percent mortgage effectively costs 4 percent for a borrower in the 20 percent tax bracket, but just 3 percent for those in the 40 percent bracket. In effect, the government is forcing taxpayers to subsidize the purchase of bigger and more expensive homes for people who would probably buy a house anyway, with or without a tax deduction. It’s high time we stop favoring the housing industry over everything else. Let the new Congress simplify our tax code by killing this subsidy and reducing top marginal tax rates across the board. Click here to visit the Business Buzz home page.