The idea of home ownership has always been revered in American culture, something young hard-working Americans should strive to achieve. The narrative, perpetuated to us by our government and the real estate industry, follows that home ownership is good for the individual because it helps him/her accumulate wealth. They say it’s good for the economy because it encourages individuals to save and it’s good for civic society because individuals invest in the well-being of their neighborhood.
For these reasons, the US government encourages home ownership by allowing homeowners to deduct mortgage interest payments from taxable income and setting up agencies like Fannie Mae and Freddie Mac that provide cheap home loans to people who might otherwise be pushed out of the private housing market.
But it seems that the government tends to see only the positive benefits of home ownership while ignoring the many negative aspects. When evaluating both negative and positive aspects then, should the government be providing incentives to encourage home ownership?
Many of the arguments for why governments should encourage home ownership sound just and practical in theory, but don’t appear to be supported by the data. The biggest argument for home ownership is that it’s a pathway to the middle class because houses are investments that appreciate over time.
The Great Recession has proven that this is not always true. Between 2006 and 2009, homes in the United States lost 30% of their value leaving ten million people with negative equity (their mortgage costs exceed the value of their home). Millions lost their homes from foreclosure and lost a lot of money on the homes they purchased.
Another argument for home ownership is a civic one. Governments argue that it creates positive externalities because people engage more in their communities. This is true, but there’s nothing to suggest that people who rent their homes wouldn’t also take pride in their communities and neighborhoods. And unfortunately, the government doesn’t encourage renting property to anywhere near the same degree that they encourage buying a home.
The promotion of home ownership is undoubtedly beneficial to the construction and real estate industry. Building and selling homes puts people to work. However, there are some unfortunate consequences to this proliferation of suburbia that the government should take into account, otherwise known as “urban sprawl”
Primarily, suburban development increases infrastructure costs. New suburbs mean there’s a need for new power grids, water pipes and irrigation systems, as well as roads, police, and firefighters. There is also an impact on traffic. People, who live in the suburbs, still usually work in the city. Suburban development will create more traffic for individuals commuting to and from the city. This, in turn, creates more pollution-a negative externality for everyone.
Of course, there are some positive aspects of urban sprawl. Suburbs tend to be safer than urban areas and the land tends to be cheaper (per square foot). However, these benefits don’t outweigh the new costs incurred by governments when they promote urban sprawl.
To be clear, I am not advocating against home ownership. There are good things about owning a home, but not enough good things to justify the kind of government incentives we have in place. Fannie Mae and Freddie Mac exist to make home ownership more accessible to the poor and middle class in America. But in the process, they are distorting the market because they are offering interest rates below market value.
If Fannie and Freddie didn’t exist, banks would have to undertake sub-prime mortgage lending with no government guarantee. This would cause interest rates to increase for many people looking to buy a home. Banks would likely require a higher principle payment in order for individuals to secure a mortgage. Both of these factors would some people from purchasing a home.
Good. One of the biggest problems in 2007, when the real estate market crashed, was people owning homes that they really shouldn’t have. People were being given mortgages often times without putting any money in a down payment. They shouldn’t be getting mortgages to begin with. Not everybody has to own a home. To be fair, subprime lending wasn’t entirely the fault of the government. Individual banks made the same mistakes that Fannie Mae and Freddie Mac did. However, the government should always be working to fix market distortions, not contribute to them.
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