Jul 26 2006 1:44PM | Permalink | Email this | Comments (1) |
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Housing subsidies are back on the political agenda in Washington after a two year absence during the 2004-05 housing boom despite the fact that the homeownership rate is near the record high level. Senator Clinton (D-NY), on behalf of the Democratic Leadership Council, announced the “American Dream Initiative” which includes four separate subsidy programs for homebuyers. This name may be familiar. Congress approved a modest American Dream Down-payment program several years ago that contributed in a small way to the recent housing boom.

One part of the initiative, the least likely to be enacted by Congress, is a call for permitting taxpayers who do not itemize deductions on their income tax returns to deduct their mortgage interest anyway. The initiative also calls for a $3.5 billion annual appropriation to subsidize down-payments, a $5,000 tax credit for first time homebuyers and a vague tax credit for employers that offer housing assistance. The full details are not yet available.

Don’t worry that the cost of housing subsidies and even the more expensive companion subsidies for college tuition might increase your taxes. Senator Clinton assures us that the cost will be covered by reducing subsidies to business. These details are to be announced later.

While I summarized the plan in 65 words, expect the final proposal to be 100 pages or more. Lots or words will be needed to assure that research grants to study the subsidies go to political friends, demonstration projects are located in the sponsor’ districts or states and that the rich people who pay for the subsidies are prevented from getting any of them.

Since this is an even numbered year, expect liberal legislators and their housing industry allies to get a few subsidy tidbits enacted. But these will neither be soon enough nor big enough to impact the housing market slowdown this year. However, they will provide some help in keeping the slowdown from worsening next year.

The bottom line is that the initiative is election year hot air that will have very little impact on the fortunes of the housing market and the homeownership rate. Congress still does not get it. Subsidies to permit low income, poor credit and young household to buy a house are not free. Their costs make homeownership more expensive for everyone else through higher income taxes and the higher mortgage rates lenders need to cover the added default risk imposed on them.

Homeownership costs have dropped dramatically in the last few years because of changes in private markets. The key changes have been moving mortgage applications to the Internet, the advent of discount and limited service real estate brokers and improved construction processes such as factory built sub-assemblies, just in time materials deliveries and tools that replace manual labor.

If Congress wants to reduce the cost of housing it should take a pledge against subsidies. There is a long list of actions Congress could take to reduce the costs they impose on housing. They could consolidate the nearly foot high pile of mortgage closing paperwork into a single form. They could break up the monopolies in real estate brokerage, title insurance, private mortgage insurance and in the secondary mortgage market. They could stop requiring banks to subsidize poor mortgage credit risks as a condition of being permitted to merge or acquire another bank. They could prohibit the restrictive zoning that drives up the cost of land for the benefit of those that got there first. And they could prohibit frivolous class action lawsuits against homebuilders and remodelers.