Homeownership and Suburban Sprawl

(Photo: Roger Wollstadt)

A new paper from economist (and city-loverEd Glaeser argues in favor of a reevaluation of government policies towards homeownership.  The abstract:

The most fundamental fact about rental housing in the United States is that rental units are overwhelmingly in multifamily structures. This fact surely reflects the agency problems associated with renting single-family dwellings, and it should influence all discussions of rental housing policy. Policies that encourage homeowning are implicitly encouraging people to move away from higher density living; policies that discourage renting are implicitly discouraging multifamily buildings. Two major distortions shape the rental housing market, both of which are created by the public sector. Federal pro-homeownership policies, such as the home mortgage interest deduction, weaken the rental market and the cities where rental markets thrive. Local policies that discourage tall buildings likewise ensure that Americans have fewer rental options. The economic vitality of cities and the environmental consequences of large suburban homes with long commutes both support arguments for reducing these distortions.

Glaeser concludes by arguing in favor of “slowly lowering the cap on the interest deduction” in order to discourage the exodus to the “sprawling suburbs.”

(HT: Free Exchange)

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  1. Todd says:

    You raise an interesting and valid point. But there are other factors too. Schools, transportation, manufacturing jobs locations and many other factors “push” people out of the cities. Isn’t there a comprehensive package of policies the government must do including easing the deduction over time? And, in doing so, wouldn’t it create political opportunities to counterbalance taking away a very popular tax deduction?

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    • KnowPD says:

      I wonder what government meddling does to these other factors? As a fellow city dweller, it means expensive private schools because the ones government provided ones are not good….

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
  2. Mark S. says:

    I would also work on removing policies that discourage tall buildings. When more people move into an area, you can either build up or build out.

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  3. ringo says:

    I don’t advocate the current, or for that matter any, governmental policies in these matters. The mortgage tax deduction is an odd constituency driven holdover from an earlier tax policy which allowed deduction for *all* interest payments of any kind. I see no reason to keep it. (and yes, I benefit from it, but so what.)

    Having said that, there are reasons for the patterns of development which we see, some market driven, some governmental. If the government would restrict itself to containing externalities the market would drive the situation toward an optimal (though dynamically adjusting) case (NOT a perfect one) which might or might not look like the present.

    It seems to me that much of the discussion on these matters is based on the particular commenter’s personal tastes and tolerances. To go to the reductio, would those who advocate apartment dwelling be willing to be moved into pod hotels or similar, or share a two bedroom apartment with an extended family as is sometimes the case in poorer places? Surely they would if high density is a good thing in and of itself. If that works, how about living with a dozen other people in an elevator or shipping container?

    This may sound absurd, but it is important for those who advocate high density living and who are either frustrated with others not sharing their enthusiasm or are tempted to seek regulatory solutions to understand that the densities they advocate sound just as absurd to others.

    IF I were in charge and we were implementing My preferences, we would be spread across the landscape much more evenly. Peak densities would be MUCH lower and the over-all the density would be much more even. I personally believe that we suffer much more from density inequality than we do from income inequality. I envision a nation of small to medium sized towns, with a little bit of low rise multi-family housing at the center, surrounded by rings of increasingly large farms and parks. In my view, cities are an economic, social, and environmental disaster which becomes worse as the population density and the size of the area of a given density increases.

    Please take this view — which I realize is not mainstream – into account when advocating policy solutions to personal taste issues.

    BTW, for those of us who live in the “Sprawling Suburbs” and beyond, I doubt very much the mortgage interest deduction is much of a factor in our lifestyle decisions. The only time I’ve ever felt personally motivated by the deduction is when living in a city and making a decision between renting or buying a condominium.

    Well-loved. Like or Dislike: Thumb up 25 Thumb down 12
    • James says:

      While we’re talking about removing tax deductions (and other government subsidies), why not the subsidies for producing more people? Then we might not need those tall buildings and/or sprawling suburbs.

      We might also add up some of the other direct and indirect costs of subsidizing urban living, such as the many developmental problems collecting under the heading of “Nature Deficit Disorder” – not just the original psychological ones, but physical conditions from asthma & allergies to nearsightedness.

      Well-loved. Like or Dislike: Thumb up 15 Thumb down 5
      • Jim says:

        right on the m0ney James. the world is way overpopulated and for the usa to support the production of more people is insane. also as a person with no children why should I subsidize those who have children, it’s unfair

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  4. Enter your name... says:

    The same effect could probably be achieved by raising the tax on land. Multi-family non-rental housing (townhomes, condos, etc.) is quite common where land is expensive.

    I think it wouldn’t be too difficult to put a cap on the mortgage-interest deduction so long as you set it quite high and let inflation do the work of “lowering” it. Voter sympathy for million-dollar homes isn’t likely to be very strong.

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    • Adam and Eve says:

      Here is a reason you should support other people’s children; they are going to work and pay the social security tax you live on Ina few years. They are going to wheel you around in your wheelchair and change your diapers and eventually bury you. Other, less selfish people have children and grandchildren to do that stuff, but you will expect it from strangers. The children and grandchildren of others will do other great things as well. Lead the world as Americans have for 200 years, perhaps create a new crop that can thrive in a warmer environment, create fun toys, like my iPhone, which keeps me connected even when the Internet is down. Maybe you are going to cure cancer, but I doubt it. Maybe if you had bothered to breed and raise some kids they might have.

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  5. CS says:

    I have an even better idea. Give a tax break to those who want to live in cities, bigger break for more dense housing preference, etc. Then those of us who enjoy our suburban (or rural) sprawl could have it it, and probably cheaper to boot. If it costs more, we’ll figure out how to make it affordable. And it would be a deliverance from those moralizing city-lovers and their friends.

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 2
  6. brent says:

    I have the best idea. Let’s eliminate ALL tax deductions, tax credits, and the like; charge a flat tax on everyone (save for a standard deduction available to all, which will eliminate say, the bottom 25% of tax payers and make the flat tax progressive), and get the federal government out of my personal business, and out of the special interest corruption business.

    Well-loved. Like or Dislike: Thumb up 33 Thumb down 7
    • Barbara says:

      The flat tax does not take into account the incomes of people who don’t receive salaries or wages. People in business for themselves, whether freelance writers, dentists, accountants, farmers, dry cleaners, some contract workers or any number of other businesses, earn income that isn’t wages that have tax withholding and FICA deductions. It also doesn’t address the issue of taxing people who live on interest from investments, stock dividends, pensions and other non-wage income.

      Because the “wages” of all those other earners have to be defined, a flat tax must be accompanied by definitions of what income is and what expenses are. That puts the government back into “personal business,” but then, I’d rather have the government defining my income than calling me up to do road work a few days a year, as happened in the 1800s. There are a lot of government services that make my “personal business” a lot more comfortable.

      It would be better to simplify the tax code. Professor James Maule of Villanova points out that cutting out many special-interest provisions (particularly tax credits) would simplify tax filing, particularly if tax law did not change every single year. See his blog Mauled Again for a thoughtful take on taxes: mauledagain.blogspot.com.

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  7. Voice of Reason says:

    What I don’t like is how the cities are somehow filled with poor, low income or unemployed people, but yet if a middle or upper income person wants to move into the city, they have to pay through the nose. Ergo, most middle class families are forced into the suburbs, while the income earners have to suffer in hour long commutes to work, and the upper income can have apartments that they barely use, and the lower income get to have dominion over prime real estate on the government’s dime.

    I’d like to see policies that match residency to supply and demand. The middle and upper classes live in the city next to their places of work, with the poor live in the country, and in the areas with the least demand.

    …well I guess they do this if they wanted to start being logical about things…

    Well-loved. Like or Dislike: Thumb up 12 Thumb down 4
    • James says:

      It’s the 21st century now, and thanks to that new-fangled internet thing, many of us no longer have to live next to our work – or indeed, even on the same continent as that work. Where will people choose to live when hour-long commutes are replaced by a few steps from breakfast table to home office?

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    • Enter your name... says:

      Your wish is being fulfilled, since the suburbs are now home to far more poor people than they were. Rural poverty has long been a blight.

      But let me complicate your world by adding a dose of reality: the only reason that richer people “have to pay through the nose” to live in the city is because they refuse to live in the cramped, dirty, run-down buildings that the poor tenants endure. I could cut my housing costs by two-thirds and live closer to the city center, if I were willing to live in the grime-caked SRO that a friend lives in. He earns little more than minimum wage and can’t afford anything else; we earn enough that we have choices, and we choose four times the square footage, our own kitchen, and three times as many windows.

      Well-loved. Like or Dislike: Thumb up 11 Thumb down 2
  8. Jay says:

    The mortgage interest deduction is a special exception to the rule for taxation of individuals, but it does not effect corporations and partnerships. Corporations and partnerships are able to deduct their interest expense as an ordinary and necessary business expense, without consideration of any special tax code provisions. The special tax rule for individuals simply allows homeowners to receive the same tax treatment for deducting interest expense as corporations and partnerships, which are the primary owners of multifamily apartment buildings. This analysis seems to ignore this fact and how eliminating the special tax rule might result in the unintended consequence that homeowners simply change the legal form of their ownership (instead of eliminating ownership).

    The tax rule that allows homeowners to escape taxation on up to $500,000 in gain on the sale of a residence, however, creates a huge difference in the way individuals and corporations or partnerships are taxed on the sale of residential real property. There is no similar rule allowing a corporation or partnership to completely escape taxation of gains upon a sale (the like-kind exchange rules only delay the taxation, they don’t eliminate it unless a subsequent sale is for a loss). Perhaps this special rule is a better target if your intent is to eliminate a distortion in the marketplace that creates incentive for owning residential real estate instead of renting it. Your thoughts?

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    • RPM says:

      Sorry, but it doesn’t quite make sense to compare the deductability of interest by businesses to that of individuals. Businesses are properly able to deduct most any expense, on the grounds that they are taxed on NET income, not gross revenues.

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      • ringo says:

        Within the paradigm of income taxation etc….

        Why should a business be taxed on net and an individual be taxed on gross?

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      • SuburbanDad says:

        Ringo, I am personally taxed on a form of net income. I receive deductions and exemptions that reduce my taxable income. The tax laws may start with my gross, and then reduce it based on deductible retirement contributions, dependents, mortgage interest, medical expenses, etc. Businesses also start with a gross, and determine net profits after their deductible expenses are figured in.

        If people were allowed to deduct all of their personal expenses, nobody would pay any taxes. Too many people live at or beyond their means, and spend almost everything they make, after taxes, each year. The smart ones invest some of what they make and save some of what they make.

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