Should Government Policies Favor Owners Over Renters?

Increasingly generous tax subsidies for homeowners are doing little to help the housing market. The U.S. Census Bureau reported yesterday that housing starts for October were down 10.6 percent from the previous month to a seasonally adjusted annual rate of 529,000. After rebounding from a historical low of 479,000 in April, starts have largely moved sideways and reflect a still-anemic housing market.

Houses are not being built because too many homes remain on the market. This surplus was created by a surge in construction during the housing bubble, combined with a drop in household formation during the recession. There is currently a 7.5 month supply of new homes for sale, down significantly from the January peak of 12.4 months but still elevated by historical standards. The homeowner vacancy rate, which measures the percent of vacant homeowner inventory for sale, was 2.6 percent in the third quarter. This was down only slightly from the peak of 2.9 percent in the fourth quarter of 2008.

Those expecting the recently extended and expanded homebuyer tax credit to improve this situation are likely to be disappointed. As I’ve written previously, most people who will receive the tax credit would have bought a house without it. And, of the additional sales spurred by the credit, most are likely to shift renters into owners, which does not help absorb the excess supply of houses.

Indeed, the credit may unintentionally be weakening the rental market. The rental vacancy rate for the third quarter was 11.1 percent, which is a historical high. The Consumer Price Index showed a decline in rent by 0.1 percent for October. The weak market was also reflected in the housing starts data, as starts with two or more units fell by 34.6 percent in October.

In a timely analysis, the Congressional Budget Office (CBO) just published an overview of all federal programs that support housing. According to CBO, in 2009 the federal government devoted almost four times the amount to support homeowners ($230 billion) compared to renters ($60 billion).

CBO estimates that the homebuyer tax credit will cost $14 billion in 2009. The Joint Committee on Taxation estimates that the extension of the tax credit will cost $11 billion more. But by far the largest tax incentive is the mortgage interest deduction, which cost government coffers about $80 billion in 2009. Aside from the inefficiency of this tax subsidy, it is also not equitable, as over 70 percent of the dollar benefits accrue to households with adjusted gross income greater than $100,000 per year.

Government policies encouraging people to borrow to buy a home partially contributed to our housing and credit market problems. And recent policies that shift renters into buyers have not helped improve housing market fundamentals. The collapse of the housing bubble should lead to a serious re-evaluation of the tax incentives for homeowners.