Response to New York Times Article “Owning a Home Isn’t Always a Virtue”

The New York Times ran an opinion piece this past weekend by Professor Robert Shiller that calls for reducing the mortgage interest deduction and other housing benefits. The article points to Switzerland as a good example of a stable high-income country that has a low homeownership rate. The article unfortunately misses the most obvious points and deviates into “hard-to-prove” areas as if they are facts.

  • Obvious Fact #1: the housing crisis arose from easy lending via private market subprime mortgages and from Fannie/Freddie’s arrogance in thinking they were private profit-maximizing companies — even though Fannie/Freddie were backed by taxpayers with government guarantees.
  • Obvious Fact #2: The housing crisis did not happen because of the mortgage interest deduction, which has been in the tax code for 100 years. Simply ask: why were there no housing crises in the 1950s or 1980s when mortgage interest deductions were also present?
  • Obvious Fact #3: The removal of the mortgage interest deduction in the U.S. will result in home price declines of about 15 percent. That translates into about $2.5 trillion in wealth destruction to property owners who incidentally pay huge portions to the federal revenue pot already. Roughly 80 to 90 percent of all federal income taxes are paid by homeowners.
  • Hard-to-Prove Area #1: Switzerland is indeed stable, but why? Is it because of or in spite of the low homeownership rate? Is it because of or in spite of an extraordinarily high rifle ownership rate to compensate for not having a standing army? Is it because of or in spite of the federalist government structure where more laws are present at the provincial level than at the national level (where they apparently live by the motto of you (the neighboring province) can do whatever you like, as long as you leave me alone)? Or is it because of the large immigrant population in Switzerland who are not citizens of the country? There are innumerable other cross-country factors that are always hard to grasp for comparison purposes.
  • Hard-to-Prove Area #2: Egypt has a very low rate of formal property ownership with a clear-cut title. Egypt is not stable – at least not yet. Many other countries had their revolution with only a few people owning land. Does America want to take a chance on low homeownership rate?
  • Hard-to-Prove Area #3: A country may be stable with a low homeownership rate but the wealth distribution could be highly unequal. Germany has a low unemployment rate and a growing economy. However, the wealth distribution in Germany is said to be very unequal, with only property owners holding on to most of the wealth. The Economist in the early July issue speculated that the relatively low ownership rate of 50 percent in Germany is the reason. Still the jury is out on the cause of wealth inequality in Germany.
  • In summary, the mortgage interest deduction has been very good for America for the past 100 years. The hard working taxpayers deserve this break. We however need to assure that massive scale subprime lending never returns.
  • With the above caveats in mind, enjoy reading the New York Times article.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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  1. Think about it this way: I’ve read that the MID costs $70 billion per year to fund. Many proposals suggest a scale back of the MID but not outright elimination but let’s just assume that it is cut completely.

    The $2.5 trillion decline in property values that you suggest is an enormous amount and could very well be overstated, but let’s assume that’s correct.

    If you figure the cost of the MID every year, in 36 years of paying we’ve paid as much in MID deductions as we would lose in value. However, the MID is a cost forever and actually will increase in cost over time.

    So we are in fact RENTING our higher home values by propping up prices using MID.

    And as we all know, renting something means we never own it.

    The Center for Budget and Policy Priorities makes some good points about MID in its current incarnation as well as suggestions for how it could be reformed to accomplish more of its stated goals while also decreasing the cost of the program:

    We can support housing, and likely do so even more effectively, while at the same time decreasing the costs of this enormous program, which by my math is almost 2% of the annual federal budget.

    Americans overwhelmingly want to see wide government reforms and every program out there could be done more efficiently than it is doing right now – we can either embrace reform discussions that will ultimately lead to a stronger America or continue to fight for a program that has flaws because we are too afraid of change.