"With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed

Two interesting posts about government intervention in the Housing Market, which is an issue we might want to consider given that the government is currently considering a massive intervention. It would seem prudent to have some goals or principles available with which to assess these various plans for dealing with housing crisis.

First, Dean Baker in the Guardian:

"The Bush administration is packing its bags and heading out the door. As they leave, we should insist they take the garbage with them. Among the items in the garbage pile should be the "ownership society".

With the collapse of the housing bubble throwing the economy into the worst recession in 70 years and the stock market deflating to levels not seen for more than a decade, the ownership society's proponents have not been anxious to talk about this concept lately. However, that shouldn't stop the rest of us from bringing up the topic.

Just to be clear on definitions, what distinguished the proponents of the ownership society from other people is that they argued for ownership as an end in itself. In the case of social security, the ownership crew wanted workers to take the risk of market fluctuations and bad investment choices, rather than having the guaranteed retired income provided by social security.

Their argument implied that these risks were ends in themselves. The returns from individual accounts could easily be beaten by the collective investment of social security money, which would lead to lower administrative costs than individual accounts. Incidentally, the higher administrative costs associated with individual accounts would mean higher income to the financial industry."

I think that there is still an argument for owning a home as opposed to renting, even, or especially for, people with less money. Namely, their money is being spent on an asset which they can sell at some point in the future, not going to a landlord. So, ownership, as opposed to renting, is a better investment, and an end in itself.

"When it came to housing, the ownership crew wanted everyone to be a homeowner. It is easy to show that in normal times it will not make sense for many people to own. There are large transaction costs associated with buying and selling. (Incidentally, these transaction costs are income for the financial industry.)

Typically, the round-trip cost of buying and selling a home, which includes realtor fees, points on mortgages, the cost of appraisals, title checks and other items, will be close to 10% of the sale price.

This is a substantial addition to housing costs for a family who will only be in a house for a short period of time. For a family buying a $300,000 house that incurs 10% round-trip transaction costs, the addition to their housing expenses will be $7,500 a year (more than $600 a month) if they live in this home for four years.

Tens of millions of families will live in their homes for less than four years. Changing employment and family situations or health factors often force people to move. For younger, less stable families, homeownership is likely to be a bad financial bet."

Yes, but that's a different point. Obviously, at least to me, the buyer needs to be able to afford the house. That doesn't mean that owning a house isn't an end in itself and a better investment than lending.

By the way, it's fine to point out that there are vested interests lobbying for any policy, but, remember, there are generally two sides to that lobbying. One can imagine Landlords lobbying against ownership by producing frightening scenarios against owning a home, trying to frighten away even qualified buyers. I don't know that such lobbying exists, but, in and of itself, lobbying or vested interests don't disqualify a policy. It's a version of Poisoning The Well, quite frankly.

"Of course that's the case in normal times. Encouraging people to buy homes as the bubble was pushing house prices to ever more unsustainable levels in the years 2003-2007 was the height of foolishness. This social engineering by the ownership society crew helped to inflate the bubble to ever more dangerous levels. The new homebuyers in these years, at least in the bubble markets, saw any wealth they had managed to acquire destroyed in the collapse."

Here we disagree as well. While government incentives can influence behavior, they cannot mechanically cause people to ignore sensible investment practices and procedures, or commit fraud, say. I can agree that these incentives helped justify some of the impetus for people buying houses, but not for the practices by individual human beings that caused this bubble.

"While we should not expect any mea culpas from the ownership gang, we should demand an end to their influence on public policy. In the case of retirement policy, the focus must be on providing mechanisms through which people can put aside money for a secure retirement. We don't have time for those who want to give people ownership at the cost of a secure retirement.

In the case of housing policy, the goal must be to give people good secure housing options. In some cases, this will mean homeownership. However, for many families, at certain points in their life, renting will be the better option."

I want to to stick to housing. Frankly, the only reason that I can see for Baker bringing up Social Security is to Poison The Well again, in the sense that he feels people's views on Social Security will positively effect his argument about housing. The two issues are not identical.

However, what he says about owning a house or renting is, again, obviously true. For some people, renting is the better option.

"A serious housing policy must ensure that good rental options exist. It should also seek to provide renters with some of the housing security that homeowners now enjoy. For example, restrictions on the grounds for which tenants can be thrown out of their homes (which exist in many cities) would provide renters with much greater security."

No sooner does he criticize housing policies, then he advances policies for renting. Surely we've learned to be dubious about government's good intentions as compared to its actual effects. Wasn't that the point?

"The disaster hitting the economy and the country's homeowners should force the Obama administration to rethink national housing policy. If progressives had been responsible for promulgating the same sort of disaster as the ownership society crew, they would not be allowed near the halls of power for the next half-century.

We don't have to banish the ownership crew, just their ideology. We need a serious discussion on housing policy that focuses on the goals that we want to achieve. We can't afford have the luxury of a housing policy that is driven by an ideology of homeownership."

It's a good idea to critique and justify all government intervention in the housing market, but it still seems to me to better, on the whole, to own a house rather than rent, if you can afford to do so.

Now Edward L. Glaeser and Joseph Gyourko on Economix:

"America shouldn’t waste the current housing crisis. With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed."

That's a very good idea. I don't like the use of the word "waste", which seems to be straining to find a benefit to the crisis. On the whole, I'd rather use less unnerving pedagogical tools.

"The policies that got us here, like Freddie Mac, Fannie Mae and the home mortgage interest deduction, put too much faith in subsidized borrowing.

Encouraging everyone to make highly leveraged bets on housing was patently a mistake. Housing policies of the past also erred by aiming at amorphous, often contradictory objectives, including higher homeownership rates, more affordable housing units and, most recently, higher prices. Those policies then mistakenly applied the same policy medicine to every housing market, whether housing was abundant and inexpensive or scarce and unaffordable. "

The incentives might have contributed to the problem, but they didn't cause the problem. An incentive is just that, a reason for doing something. There are always other possibilities and reasons to be considered in any action.

"The problems of old-style housing policy are well illustrated by the unwise proposal being considered to provide subsidized loans to home buyers at 4.5 percent interest. The historical, quite modest relationship between interest rates and housing prices suggests that this proposal will increase housing prices by at most 5 percent. A 5 percent price rise will do little to stem foreclosures in markets where prices have already fallen by 30 percent."

Here I agree, and said that we should let housing prices fall another 5 %, which would be a better deal for the buyers if rates remained roughly where they are now.

"Subsidized lending looks cheap, but isn’t.

When the government lends, taxpayers end up paying for the defaults that follow. Those people who claim that the plan will be cost-free seem to forget that this spurious argument was made to justify Freddie Mac’s and Fannie Mae’s credit guarantees. The policy will also encourage more overbuilding in Las Vegas and more over-borrowing in Detroit, neither of which is a good policy objective. "

Subsidies are not cost free. Although, one can imagine the government running a mortgage business that makes money. Here's where the contradiction comes in, because, in order for it to do so in the taxpayer's best interests, the terms would have to be very stringent, and wouldn't be possible for borrowers on the margin. If you decide to loan to more risky borrowers, then you have to state up front that possible losses are acceptable and justifiable.

Subsidies can effect the market in which they are used, often with unanticipated results. They should be used carefully.

"In our new book, “Rethinking Federal Housing Policy,” published by the American Enterprise Institute (and available for free download here), we argue that federal housing policy should ensure that our poorest citizens are able to live in decent housing ( I AGREE ), and should address the high housing costs facing many middle-income Americans ( DON"T AGREE, BUT THIS COULD BE DUE TO A DISAGREEMENT ABOUT MIDDLE CLASS ).

These are two distinct problems that require two different solutions — neither of which involves subsidized lending."

"The first problem, the shortage of housing for the poor, is best solved by providing more housing vouchers, not expensive tax programs aimed at stimulating construction of affordable housing. Subsidizing developers to build new housing for the poor makes no more sense that paying auto companies to provide a special line of poor people’s cars. Our current system, where the poor generally buy used cars, is a much more efficient way of providing cheap transportation. Section 8 vouchers can enable the disadvantaged to live in existing homes, which is much cheaper than new building.

The Low Income Housing Tax Credit, the primary tool for subsidizing housing supply, makes the mistake of trying to apply the same rules everywhere. It subsidizes new housing in Manhattan, which needs more building, and in Buffalo and Houston, which already have plenty of cheap homes. A better approach would be to scrap the tax credit and make Section 8 vouchers more available and portable across cities."

That's fine, but a voucher is a subsidy, isn't it? It could effect prices. Anyway, yes, I prefer a voucher.

"Section 8 vouchers aren’t going to do anything to ease the high housing costs facing middle-income Americans, though. That problem requires policies that reduce the barriers to building.

The current housing price slump shouldn’t disguise the fact that homes in San Francisco and New York remain extremely expensive by historical standards. Prices are far above construction costs because robust housing demand, fueled by rising economic productivity, has collided against barriers to supply, like minimum lot sizes and height limits.

Borrowing subsidies, including the home mortgage interest deduction, do little good when housing supply is constrained. In markets with limited supply, credit subsidies push up housing prices, and make housing less, not more, affordable.

Moreover, the benefits of the deduction go disproportionately to richer Americans who itemize on their tax returns and own bigger homes. Rather than a new round of credit subsidies, it makes more sense to gradually reduce the upper limit on the home mortgage interest deduction and shrink the public role in encouraging people to bet big on housing.

The only path towards widespread affordability is to build more, which requires reducing NIMBYist regulations. Localities tend to put their own interests ahead of the nation’s interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency. After all, stopping building in one area just leads to building and more congestion somewhere else. In other settings, when groups try to increase prices by restricting supply, the government sends in the antitrust police.

In the housing context, this means prodding restrictive, high-cost areas to permit more building. New York and greater San Francisco are the two most productive areas in the country, but people have increasingly moved to lower-wage Sun Belt cities because those areas have low housing prices created by unfettered supply.

It is bad economics to let local barriers drive people to less productive areas, and it is also bad environmentalism. The environmentalists who prevent building in temperate California are actually increasing carbon emissions, by driving people to build in the far more energy-intensive suburbs of Houston and Phoenix.

Expensive localities are never going to give up their growth controls on their own, but the stimulus package provides a natural tool for promoting affordability. If some aid to expensive states is made conditional on permitting more construction, then pricey places will face incentives to permit more units and promote affordability. Those incentives will encourage restrictive cities and towns to look beyond their borders, and to make America more affordable by permitting more construction in the high-price housing markets that are undersupplied and unaffordable even to the middle class."

Here I agree. If people really want housing prices to stay down, then they need to change the regulations on housing construction and use. It's a trade off, but it's the one sure way to lower housing costs.

In essence, I agree that we should reconsider our housing policy now. Baker makes a good point about the vacuousness or negative consequences of boldly declaring an "Ownership Society", not tied to sensible economic practices. But Glaeser and Gyourko have better ideas about how to deal with our housing policy.