Tuesday, May 31, 2011

Judging the Efficacy of Public Policies

What are the effects of public policies on housing? From my point of view federal housing policies have the combined effect of making current homeowners poorer and not substantially increasing the percentage of Americans who own houses.

Some of the largest subsidies in the tax code and in public policies are to increase homeownership in the US.   The release of the housing numbers today suggests that the housing market continues to have problems.  Prices are down significantly in some markets and less so in others over the last three years. The rate of homeownership is also dropping in the US.

There is not very strong evidence that the deduction encourages  more families to own houses.  The US is thirteenth in home ownership rate. Many below and above have no similar provision in their tax codes.   At the end of the Clinton Administration the tax code was amended to eliminate capital gains from home sales.   That probably encouraged homeowners to trade their houses a bit more and may have artificially inflated home prices.

At the same time, beginning with the Carter Administration, there have been policies to increase homeownership among low income buyers.  The US policy is the Community Reinvestment Act (CRA) which was expanded significantly in the Clinton Administration.  The evidence on these policies is also mixed.  Lenders and guarantors were encouraged to loosen credit requirements and that may have made the market for houses more frothy.    The interaction between the CRA and the increased liberality on leverage in the government sponsored enterprises also moved to increase activity.

The most obvious payoff on public policies is seen in the Schiller-Case numbers that dropped to the lowest level since the index has been collected.  Huge amounts of equity have wiped out.  Homeownership is trending down.   And with all those policies in place the US is still in the middle of the pack in terms of homeownership.  If we were to eliminate the deduction, the CRA and the GSEs would the market be stabilized and would homeownership decline significantly?  Not likely.

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