Thursday, July 31, 2008

Solution to the Housing Crisis: Build More Houses

In the housing bill, there's a provision to build more affordable houses. So the current problem is house prices are too low. One of their solutions is predicated on the fact that they are, or will be, too high. Lest you think this is an anomaly, note that politicians and many journalists bemoan the high cost of gas, while trying to cut our carbon footprint.

This is a main reason why I think government should be shrunk. When it tries to do something, it just becomes a Christmas tree of giveaways to special interest groups like ACORN, often with inconsistent objectives.

Prices too low, too high, whatever. The key is, government is going to do something. Yea!

5 comments:

Anonymous said...

If markets work so well, how come the banks made all those mortgage loans all that money to people who can't pay?

Anonymous said...

There's already a tremendous incentive program to build big houses: Deductability of Mortgage Interest.

If someone in a 33% rate pays $60,000 a year in interest on a $1,000,000 loan, they get a $20,000 subsidy.
If someone in a 15% bracket pays $6,000 interest a year on a $100,000 mortgage, they get a $900 subsidy.

Why should the wealthy guy get 22 times the home subsidy to buy a big house then the struggling, middle class guy to buy a 2BR shack on 1/10th of an acre?

Forget about fairness. If the goal of Mortgage Interest Deductability is to build a middle class, is this the best way to spend $$$?


So with this lopsided incentive for bigness, the results are incredibly predictable: As Per Capita GDP increases, we are subsidized into building bigger houses on more land (which is usually) further and further from downtown. Which requires we build more roads, new sewer lines, new water lines, abandon old schools in the city and "interior suburbs" to build new schools and public services in the exterior suburbs.

Some of that would have happened without the subsidy. But would it have happened to the same extent?
You can't argue that the side effects of the policy weren't predictable.

Anonymous said...

Eric, do you favor eliminating mortgage deductability and lowering the marginal rate?

If the goal is creating a stable society by encouraging home ownership (Bush's "Ownership Society"), why not a simpler flat $2,000 annual credit for every home owner?

Otherwise, most of the subsidy for home ownership goes to those that don't need an incentive. And there is very little incentive for the lower middle class.

Eric Falkenstein said...

Why are there bubbles? Big literature, and I think they are unavoidable. But at least the banks are paying for their mistake, as stockholders have lost a lot of their money over the past year, more than any they made the prior 10. Governments, meanwhile, don't have to pay for their mistakes. So the benefit of the market is they rarely make the exact same mistake twice, whereas the government will persist in doing something with a negative return ad infinitum.

Frank said...

@12:20. Not too mention that you can't have an argument about a housing bubble without including the government's role in setting interest rates. If interest rates hadn't dipped as low as they had, the bank's would not have been able to create as big a mess, at the very least. Blaming the banks is a little to easy and doesn't begin to explain the situation, not to mention that they do suffer from their consequences as noted above - Your comment is really a little off-topic.