Edward L. Glaeser

Back off from our housing choices

By Edward L. Glaeser
March 10, 2011

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IN FEBRUARY the Obama administration took two modest but welcome steps toward toward reducing federal subsidies for suburbia by proposing changes to the home mortgage interest deduction. But President Obama should go further, and make the case that the American dream is found as easily in a skyscraper as in a ranch house. He should even ask his libertarian opponents to join in a fight against paternalistic public programs that artificially subsidize suburban life.

The administration’s report “Reforming America’s Housing Finance Market’’ argues that the public role in housing “does not mean our goal is for all Americans to be homeowners.’’ Instead, it says, “Americans should have choices in housing that make sense,’’ and, “This means rental options near good schools and jobs.’’ The report wants to “responsibly reduce Fannie Mae and Freddie Mac’s role in the market and ultimately wind down both institutions.’’ While they exist, the report urges them to charge more for mortgage guarantees, as if they were “private banks or financial institutions.’’

In a parallel initiative, the president’s budget would reduce the deduction write-off for families who make over $250,000. This change starts downsizing the home mortgage interest deduction, which, like Fannie and Freddie, bribes Americans to borrow more to buy bigger homes and leave cities for suburbs. Homeownership will always make sense for many Americans, but we don’t need to encourage people to borrow more money.

Much mischief has been worked by the mortgage subsidies that were explicit in the tax code and implicit in Freddie Mac and Fannie Mae. The subsidies encouraged Americans to invest in houses instead of businesses that bring growth. They prodded Americans to build ever larger homes that use more energy. The subsidies are also regressive. According to economists James Poterba and Todd Sinai, the deduction’s benefits are 10 times greater for families earning more than $250,000 than for middle income families.

Some argue that mortgage subsidies support wealth accumulation, but it seems odd to encourage saving by subsidizing borrowing. Interest subsidies lead homeowners to pull equity out of their homes, and Freddie and Fannie were part of the proliferation of low-money-down mortgages that made saving unnecessary for prospective homebuyers.

The great housing convulsion of the past decade illustrates that housing prices can crash as well as soar, and that encouraging Americans to make leveraged bets on housing can lead to a foreclosure society instead of an ownership society.

These home-borrowing subsidies also pull people out of America’s urban centers. More than 85 percent of people in detached homes are owner-occupiers, in part because renting leads to home depreciation. More than 85 percent of people in larger buildings rent. Since ownership and structure type are closely connected, subsidizing homeownership encourages people to leave urban high-rises and move into suburban homes.

The Obama administration has more enthusiasm for cutting home-borrowing subsidies than curbing federal funding for sprawl-inducing infrastructure, and that’s a shame. The proposed budget continues to increase highway spending, when we really need a profound commitment to using cost-benefit analysis for all transportation spending, road and rail alike.

The battles over the policies, like homeownership subsidies, that impact cities are often seen as fight over federal largesse, which leads to old, painful conflicts between urban Democrats and suburban Republicans. But a better framework might start with a respect for individual freedom that should cut across party lines.

Every Tea Party member should be willing to affirm that the federal government has no business shoehorning Americans into a particular lifestyle. That affirmation naturally leads to the conclusion that the government should stop socially engineering suburban lifestyles by subsidizing homeownership. Shouldn’t Americans be free to choose the city or suburb that suits them best without the federal government prodding them toward low-density living?

Edward L. Glaeser, a professor of economics at Harvard University, is author of the forthcoming book “The Triumph of the City.’’ His column appears regularly in the Globe.