The Housing Bailout

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

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NEW YORK SUN CONTRIBUTOR

As the Washington political class gets ready to pour billions of dollars into a bailout of mortgage repackagers Fannie Mae and Freddie Mac, the question is when will it stop? When, that is, will someone call a halt to the taxing of ordinary Americans who pay for their own housing to provide a subsidy to those who don’t?

It is not, after all, as if the cases of Fannie Mae and Freddie Mac are the first time that the government has attempted to prop up the housing market. According to the federal Office of Management and Budget, the amount of taxpayers’ money the department of Housing and Urban Development spends has soared 67% to $52 billion in 2008 from $31 billion in the last year of the Clinton administration.

Then there are the ways housing is favored by the tax code. The home mortgage interest deduction is estimated by Congress’s Joint Committee on Taxation at $79.9 billion in 2008. It applies to interest on up to $1 million of mortgage debt secured by the taxpayer’s first or second home. The committee reckons the capital gains tax exclusion on the first $500,000 in gains on the sale of a house by a couple filing jointly costs $29 billion. It reckons the federal tax deduction for local property levies costs another $14.3 billion.

Economists call those figures “tax expenditures.” President Bush’s advisory panel on tax reform, in its 2005 final report, said, “Together, these benefits provide a generous tax subsidy for taxpayers to invest in housing because the purchase and maintenance of a home is subsidized and a substantial amount of appreciation is not taxed. But there is a question whether the tax code encourages overinvestment in housing at the expense of other productive uses.”

The report notes that the residents of the United Kingdom, Canada, and Australia all manage to get by without a home mortgage interest deduction in their tax code. All three countries have home ownership rates roughly comparable to America’s. “Thus, it appears that the level of subsidies provided in the United States may not be necessary to ensure high rates of home ownership,” the report says.

Vast sums are involved. The three tax expenditures identified by the Joint Tax Committee total $123.2 billion a year. Add in the HUD budget and the total is $175.2 billion, nearly half the federal budget deficit or about $1,300 for every personal income tax-return filer. The spending has resulted in a housing price bubble that has enriched some Americans while making it difficult for others to afford to buy — or keep — homes.

Now that the bubble has burst, the Bush administration wants to add, on top of all the above enumerated subsidies, an unspecified amount of additional taxpayer cash to prop up Fannie Mae and Freddie Mac, their shareholders, and their bondholders — all in the name of what Secretary Paulson claimed over the weekend is “support for the housing market.”

It happens that the housing business isn’t the only one that is sagging these days. Other businesses — banks, automakers, and the lowly newspaper racket, to name but a few — have been declining without the benefit of federal assistance. So what’s with housing? It’s not as if doling out lucre to homeowners is an enumerated Constitutional power. No doubt the Founders understood that when the government tries to support one sector of the economy at the expense of another, it almost always does more harm than good.

The law of unintended consequences is too strong. Just as government ethanol subsidies have led to African famine and soaring food prices, so too the government support for the housing sector — and its failure to protect a sound dollar — has led to a bubble and a financial crisis. Rather than raising the stakes by throwing bad money after good, the right move now would be to ease the government out of the housing market and give the savings back to taxpayers, who are better suited than Secretary Paulson or than some housing tsar to decide for themselves whether they want to spend their money on houses or something else.

NY Sun
NEW YORK SUN CONTRIBUTOR

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.


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