Wednesday, February 18, 2009

On housing and foreclosures

President Obama (I still can't get used to write that) presented today his plan to turn the tide in the massive wave of foreclosures that has greatly contributed to the current economic crisis. I won't get much into the details of the plan, as the Center for American Progress has a better analysis (it is a meaty plan, unlike Geithner's bank bailout), but I think it deserves some additional general comments. Mainly, do we want the government to work to promote home ownership?

The Federal government (and to a lesser extend, state and local governments) spends a great deal of resources via both guarantees and tax breaks to promote home ownership. Be it through income tax deductions, be it by creating strange financial creatures like Freddy Mac and Fannie Mae, the path to homeownership is paved with government subsidies. This creates some odd effects in the housing market, mainly by making the purchasing a house much cheaper and easier to finance, and thus making it a much more desirable investment.

As we have seen in the past few months, purchasing a house could be a pretty lousy investment. It does not always retain value, it is pretty hard to sell when the economy goes South, and it is the perfect example for many of putting all your investment eggs in one basket, being as it is a pretty massive purchase. In addition, home ownership reduces the flexibility of the economy, as people become much more reluctant to move when the economy tanks in a region.

Even with these drawbacks, the Federal government has promoted since the 50s policies that push people towards this lousy investment, giving them strong incentives to buy more of it (bigger lots, bigger houses) to maximize the tax breaks. It promotes sprawl by both making housing cheap and big houses more desirable.

Some people have critizised the Obama plan because it will make banks more reluctant to lend money for mortgages in the future. I am with Matt Yglesias that this is not actually a bug, but a feature of the plan. We need to think less on making homeownership cheap, and focus more on making housing (including renting) affordable.

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