There are many problems with federal housing policy. One is the mortgage-interest deduction. It might seem impossibly dull to think about the mortgage-interest deduction. Peel back the dullness and we find some of the most egregious inequalities in our society. It’s not entirely a joke to say the term itself, seven syllables short of a coma, is what allows those who wish to ensure government’s most generous welfare policies continue to reward the wealthiest members of society.
I’m not going to criticize homeownership. I own a home and want to see everyone who dreams of owning one get a chance to as well. Nothing is wrong with renting. But families, and individuals too, do not achieve financial security by renting, not like they can by owning a home. Once a lease expires, one doesn’t own anything of what was paid for. Renting is strictly about consumption; owning a home is about holding an asset, the largest asset most American families will ever have, and this is what makes it an asset with the potential to propel them out of just getting by into getting ahead.
Families benefit in many ways by owning a home. In the 2008 hunger report, Working Harder for Working Families, we discussed these in our chapter on Asset Development. For example, at identical income levels, children in families that own homes do better in school than those that rent, they graduate from high school more often, experience fewer behavioral problems and achieve greater economic success as adults. Parents who are homeowners also do better than their peers who rent. Fewer married couples that own their home get divorced and they participate less in government welfare programs. So it would seem to make sense for the government to help all families to become homeowners.
Many people hear the words ‘housing assistance’ and immediately think Section 8 rental housing. Poor families warehoused in crowded inner city neighborhoods: New Orleans, the hurricane, desperate images. In reality, federal assistance for rental housing is dwarfed by much larger forms of assistance provided to homeowners, and that comes almost entirely in the form of tax expenditures. Federal housing assistance totals about $200 billion per year. Some people might resent characterizing tax expenditures as government assistance, but it’s assistance any way you look at it, delivered through the tax code, as are most forms of government assistance to the wealthy.
People purchase a home with a loan, a loan of course that comes with interest. This you can deduct from your taxes, hence what’s called the mortgage-interest deduction. The larger one’s house, the larger the tax advantages. On a million dollar mortgage, for example, the mortgage-interest deduction is worth more than $20,000 per year. I guess I’ll ask it—but do I really have to: Does anybody with a million dollar mortgage need this kind of help from the government?
Realtors and homebuilders will tell you that tax incentives created by the likes of the mortgage-interest deduction are what has fueled the rapid expansion of the housing industry over the past fifty years. But that doesn’t stand up to analysis. For one thing, only about half of all homeowners claim the mortgage-interest deduction, and it mainly goes to people who would own a home regardless of the tax advantages. There are many other reasons for the explosive growth in homeownership rates in the second half of the Twentieth Century. The GI Bill, the establishment of the Federal Housing Authority, and even the evolution of subprime lending have done far more to make the U.S. a homeowner nation than the tax code.
I usually don’t care for graphics with crowds of data, but the table below from a briefing paper by the Tax Foundation in 2006 shows how skewed the benefits of the mortgage-interest deduction were during tax year 2003. Click on it to enlarge.
According to Gillian Reynolds of the Urban Institute in a paper published just a couple of weeks ago, “The top income quintile (or richest 20 percent of the population) claimed the vast majority of benefits at 81.5 percent—more than four times the share of the lower four quintiles combined.”
If we agree homeownership is a path to financial stability, shouldn’t the focus of government assistance be on helping people get into a home? To purchase a home, you need savings to come up with the down payment and be able to cover the closing costs, but if your basic living costs are already stretching you to the max, how do you save? Here’s one suggestion: Reduce or eliminate the mortgage-interest deduction and instead aggressively promote savings opportunities that encourage families that want to own a home to achieve that dream.
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