Failure, Not a
The financial collapse has its roots in a series of government actions that have distorted and obscured the true nature of home ownership.
By John H. Makin
As a people we need, at all times, the encouragement of home ownership.
HERBERT HOOVER, 1932
N~1 HE IDEA that home ownership
\ J confers special benefits on American society is deeply embedded in our culture—so much so that our national tax policy confers a special benefit of its own on it. Home owna ership is granted an advantage over all other forms of ownership in the form of an enormous deduction on the interest payments most individuals incur in financing their homes. Nothing else in
J O H N H . MAKIN is a visiting fellow at the American
Enterprise Institute and a principal at Caxton Associates.
the tax code comes anywhere near that deduction in scope or size. We have decided, as a nation, that home ownership is not only a good thing for an individual or a family, but that it is beneficial for the public at large and the country as a whole. Otherwise, why would it be necessary for the government to give it this kind of preferential treatment? Without it, clearly, we believe that the national rate of home ownership would be lower, and that a lower rate of home ownership would be deleterious to our common weal.
After 2000, the national push toward home ownership intensified in three dimensions, leading to a doubling of housing prices in justfiveyears' time. First, the Federal Reserve Board's interest-rate policy drove down the cost of borrowing money to unprecedented lows. Second, a common conviction arose that home ovraership should be available even to those who, under prevailing conditions, could not afford it. Finally, private agencies charged with determining the risk
This is not to say that there is no such thing as market failure. There are many instances of market failure. Someone may possess information that others do not, as in insider trading, and thereby gain an illegitimate leg up. There may be too few players in a given market, which allows them to manipulate, hoard, and toy with prices. Capricious government intervention in cases where it is neither required nor appropriate constitutes another condition that may create a market failure.
There are also cases of market failure in which some people get a free ride while others bear a disproportionate burden. This is the case in national defense, for example, in which soldiers bear a burden non-soldiers do not. Consequently, a government subsidy for national defense is necessary for the maintenance of security and power, and the overwhelming majority of citizens acknowledges it and does not complain about it. National defense is a public good, perhaps the original public good.
Owner-occupied housing is something else that has been deemed a public good. Herbert Hoover's affirmation of the need for encouragement of home ownership "at all times" came in 1932 at the fiercest stage of the Great Depression. Others have made powerful arguments that homeowners make better citizens and contribute to stable communities. Why renters do not and cannot offer the same contribution to the public good is never specified, but existing homeowners, homebuilders, mortgage lenders, and mortgage servicers have all seized on the idea that subsidizing home ovraership is "Parieto optimal."
Subsidies for home ownership—in the form of full deductibility of mortgage interest, lower mortgage borrowing rates derived from government guarantees
CCORDING to The New Palgrave Dictionary of for mortgage lenders like Fannie Mae and Freddie
Economics, an invaluable collection of pre- Mac, and deductibility of local real-estate taxes—have
-cise summaries of virtually every topic in the long benefited those who own homes at the expense dismal science: "The best way to understand…