Expanding Access to Homeownership

New homeowners Lateshia, Sylvia, and Tyrell Walton stand in front of their new home.  U.S. Navy photograph by Mass Communication Specialist Seaman Shamus O’Neill

Christopher Herbert et al. has posted Expanding Access to Homeownership as a Means of Fostering Residential Integration and Inclusion. It opens,

Efforts to enable greater integration of communities by socioeconomic status and race/ethnicity have to confront the issue of housing affordability. Cities, towns and neighborhoods that offer access to better public services, transportation networks, shopping, recreational opportunities, parks and other natural amenities have higher housing costs. Expanding access to these communities for those with lower incomes and wealth necessarily entails some means of bringing housing in these areas within their financial reach. While households’ financial means are central to this issue, affordability intersects with race/ethnicity in part because minorities are more likely to be financially constrained. But to the extent that these areas are also disproportionately home to majority-white populations, discrimination and other barriers to racial/ethnic integration must also be confronted along with affordability barriers.

Enabling greater integration also entails some means of fostering residential stability by maintaining affordability in the face of changing neighborhood conditions. This issue is perhaps most salient in the context of neighborhoods that are experiencing gentrification, where historically low-income communities are experiencing rising rents and house values, increasing the risk of displacement of existing residents and blocking access to newcomers with less means. More generally, increases in housing costs in middle- and upper-income communities may also contribute to increasing segregation by putting these areas further out of reach of households with more modest means.

It is common to think of subsidized rental housing as the principal means of using public resources to expand access to higher-cost neighborhoods and to maintain affordability in areas of increasing demand. But for a host of reasons, policies that help to make homeownership more affordable and accessible should be included as part of a portfolio of approaches designed to achieve these goals.

For example, survey research consistently finds that homeownership remains an important aspiration of most renters, including large majorities of low- and moderate-income households and racial/ethnic minorities. Moreover, because owner-occupied homes account for substantial majorities of the existing housing stock in low-poverty and majority-white neighborhoods, expanding access to homeownership offers the potential to foster integration and to increase access to opportunity for low- income households and households of color. There is also solid evidence that homeownership remains an important means of accruing wealth, which in turn can help expand access to higher-cost communities. Owning a home is associated with greater residential stability, in part because it provides protection from rent inflation, which can help maintain integration in the face of rising housing costs. Finally, in communities where owner-occupied housing predominates, there may be less opposition to expanding affordable housing options for homeowners.

The goal of this paper is to identify means of structuring subsidies and other public interventions intended to expand access to homeownership with an eye towards fostering greater socioeconomic and racial/ethnic integration. (1-2, footnotes omitted)

The paper gives an overview of the barriers to increasing the homeownership rate, including affordability, access to credit and information deficits and then outlines policy options to increase homeownership. The paper provides a good overview for those who want to know more about this topic.


Strange Love for Homeowner Tax Rates

                                  Peter Sellers as Dr. Strangelove

With a nod to Dr. Strangelove, David Hasen has posted a scary little thought experiment, How I Learned to Stop Worrying and Love our Homeowner Tax Rules on SSRN. The essay “estimates the magnitude of life-cycle tax benefits available from home ownership for representative taxpayers.” (1)

Hasan starts with a not-that-far-fetched example of a couple who purchases a California home in the 1960s. The home passes to their daughter and son-in-law in 2013. he documents a federal and state tax savings of about $15,000 per year for every year the home is owned by the family.

Hasan concludes,

A large literature has examined the distributional and allocative effects of the homeowner tax rules described above. Summarizing, the literature notes that the rules favor homeowners over renters, owners of larger homes over owners of smaller ones, and residents of states with a large owner-occupied housing sector over residents of other states. The literature also notes the efficiency costs associated with the rules, as taxpayers respond by adjusting their economic positions in ways that reduce total social wealth. The responses may include holding property rather than selling it, occupying it rather than renting it, and swapping it rather than selling it for cash, all as described above. Each of these choices, when tax-motivated, creates real economic costs.

The contribution of the present discussion is modest. One largely hidden aspect of the rules has been just how large the dollar tax savings can be relative to affected taxpayers’ overall tax liabilities, especially when considered in life-cycle terms. The discussion above gives a sense of the numbers for a relatively typical, albeit profitable, course of investment over two generations for an upper-income, but by no means wealthy couple. The bottom line is that for such a couple, taxes are reduced by 40 to 50 percent.

Benefits that are heavily skewed to higher income taxpayers and, consequently, that undermine the general distributional structure headlined in the law promote neither civic pride nor a sense of common purpose; benefits that have massive allocative effects create a large drag on the economy. If I hadn’t learned to stop worrying and love our homeowner tax rules, I might even be upset myself. (10, footnotes omitted)

Academics, myself included, rail against the way that federal housing policy overwhelmingly favors owners (wealthier, on average) over renters (poorer, on average), primarily through the tax code. It does not seem like the political will is there to change that dynamic at present. Nonetheless, it is important to keep reminding everyone of the facts:  federal housing policy heavily favors the wealthy over the poor, a sure sign of a poorly designed social policy.

Here Comes The Housing Trust Fund

HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)

The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)

Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction.  Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.

So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.

While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..