Buy a Home, and Drag Society Down

If this "get rid or reduce the homeownership deduction" idea gains steam, watch out below!

THE recent proposals by President Bush's panel on tax reform led to a debate on whether the mortgage interest deduction was unfair, providing a huge subsidy for the rich while doing little for low-income Americans. But that debate poses a more fundamental question: Is homeownership a social good?

It has long been an article of faith among policymakers that homeownership produces a big beneficial spillover to society at large. In the 1920's, Herbert Hoover said a family that owned a home had "a more wholesome, healthful and happy atmosphere in which to bring up children." Franklin Delano Roosevelt said that "a nation of homeowners is unconquerable."

The government's use of tax incentives to encourage homeownership has a cost, however. The mortgage interest deduction and other subsidies will cost the government roughly $716 billion in lost taxes over the next five years, the president's tax panel said. And the subsidy distorts incentives to invest, pulling money into housing from other parts of the economy. So, are Americans getting value for their money?

"Theory suggests there are social benefits to homeownership, but we don't know whether they are large enough to justify the size of the subsidy," said Joseph Gyourko, professor of real estate and finance at the University of Pennsylvania's Wharton School. "My gut feeling is that we are oversubsidizing."