Housing Subsidy Contribution to Homeownership

Since the government first began to dabble in housing policy eight decades ago, the goal has pretty much always been to increase homeownership. Whether it is supporting 30-yr FRM, increasing liquidity for mortgage finance, or propping up prices, everything is about making homes more affordable for more people to buy (since that is supposedly the American Dream) while somehow also making homes an investment that yield huge returns for the homeowner. The conflict of homes rising in price to get an investment gain while also trying to make homes affordable (implying falling prices, as with every other asset or commodity) has been long lost on Washington.

But let’s suppose for a moment that striving to increase the homeownership rate is a good thing. It is not (for the numerous reasons we’ve discussed on the blog) but let’s just suppose for a moment: has the government’s role in housing actually influenced the homeownership rate?

A working paper from Daniel K. Fetter (Wellesley College) first published this summer and updated recently examines the home loan benefits that were provided by the GI Bills following WWII and the Korean War. This time frame, 1940 to 1960, saw a correlated increase in homeownership from 44 to 62 percent. That large jump then flattened out, as homeownership rates hit a peak of 69.2 percent at the end of 2004, falling back to 65.9 percent as of the summer of 2011 (also the homeownership rate at the start of 1998).

So what was the cause of the jump? Government support? Looking just at the impact of the GI Bills, Fetter estimates government subsidies contributed to 25 percent of the increase in veterans becoming homeowners between 1940 and 1960. That could be seen as respectable impact, though for the levels of spending and distortion, it shows the subsidies were not the primary driver for increasing homeownership. More damning is Fetter estimates from there that government subsidies contributed to just 7.4 percent of the aggregate increase in homeownership from 1940 to 1960. A paltry contribution at best.

Here is the real kicker, looking at the impact on the age distribution for homeowners, Fetter finds that “mortgage subsidies appear to have increased aggregate rates of home ownership by shifting home purchase earlier in life, rather than by shifting those who never would have purchased into home ownership.” Figure 2 in the Fetter paper shows the age distribution for homeownership changes substantively starting in the 1960s vs. the previous decades, though it stays roughly the same into the 1970s and 1980s.

Fetter writes, “The change in the age profile of home ownership from 1940 to 1960 suggests that much of the increase was associated with a decrease in the age at entry into ownership, for which one natural explanation would be a trend towards easier terms in mortgage borrowing.” So it wasn’t that the government increased aggregate homeownership prospects as much as it made homeownership happen sooner. As such, subsidies are not helping people achieve and abstract notion of the American Dream that might otherwise not, they are just making the Dream come true faster, according to the research.

If this holds true (and again, I’m giving lots of benefit of the doubt to those favoring subsidies right now for the sake of argument), then the question should be honestly asked: is this the role of government? To provide subsidies to just make something (in this case the American Dream) happen faster that will probably happen anyway?

(We should at least acknowledge that in this case it is not the American Dream being defended so much as it is the American propensity to want things now and not be patient. When you think about the cliche that is the American consumer, the notion is not that crazy.)

Some might answer “yes” to this question—as if it is somehow objectively better to just have to save a down payment for 2 years instead of 14. Others will suggest that becoming a homeowner maker you a better citizen, so we will want people to become homeowners faster. Either of the arguments can be made and are worth discussing on their merits, but it is important to know which of these (or other) points someone is holding in value, otherwise we can not have an effective conversation about housing policy reform as a country.

Everyone will just talk past each other if some are fighting against subsidies because they distort capital and cause bubbles, while others are fighting to get households quickly on a ladder to the middle class. The policymakers have to recognize this, stop, and discuss each point on its own terms—do housing subsidies contribute to bubbles? Should getting people in the middle class be a government role? Will these people become homeowners eventually anyway? Are there inherent benefits to homeownership caused by buying a home as a opposed to just being correlated with owning a home? Those are the debate points. There might not be agreement, but at least the discussion will be properly focused.