tag:blogger.com,1999:blog-1110014885778996459.post8769877093544935110..comments2024-03-28T01:12:29.954-07:00Comments on Idiosyncratic Whisk: Housing policy - please do the oppositeKevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-1110014885778996459.post-14813481745201555822023-08-11T02:28:25.983-07:002023-08-11T02:28:25.983-07:00I must thank you for this excellent read! It was a...I must thank you for this excellent read! It was absolutely enjoyable throughout. I have you bookmarked to check out the new content you provide<br />Good way of explaining. Now it's time to avail <a href="https://thepartybusrental.com/bus-tours-washington-dc/" rel="nofollow">bus tours Washington dc</a> for more information.<br /><br />Jameshttps://www.blogger.com/profile/11256331208091909935noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-80696723188902185122014-12-29T22:48:22.131-07:002014-12-29T22:48:22.131-07:00Thanks for the input, Glenn. It's definitely ...Thanks for the input, Glenn. It's definitely a complex issue. I agree that the interest deduction wasn't a large factor in the price increases of the 2000's. Although, thinking about it, the decline of other market frictions in the 2000's probably increased the aggregate effect of the interest deduction. But, you're right. It has been a longstanding distortion, and at most would increase some home prices by something in the single digits (%). The effect it might have on average home prices, in and of itself, is not the main problem with the policy.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-56657596593952708472014-12-29T11:27:57.062-07:002014-12-29T11:27:57.062-07:00Finally, Kevin, a post on housing with which I can...Finally, Kevin, a post on housing with which I can find nothing seriously disagreeable! I think there is room for a debate on the semantics of Shiller's comment (I doubt he would find anything disagreeable about your post, here, other than your negative characterization of his comments about housing being a poor "investment"), but that's kibble.<br /><br />Otherwise, I am willing to grant you that if there are excess economic rents captured by the landowning class due to market distortions, the erosion of those rents would likely come more from rising asset prices than falling rental rates due to sticky prices. It is not clear to me that this was the principal or even a significant contributor to the rapid price appreciation immediately prior to the recession, but it was probably a factor (inarguably, the homeowner market of the 2000's was more egalitarian than it had ever been, FOR BETTER OR FOR WORSE).<br /><br />In practice, as you say, there are numerous public policies which both encourage homebuying, subsidize owner rents, and support real estate prices. Together, these have the effect of keeping home prices AND rents high, so that unwinding them towards a market equilibrium becomes a difficult task, indeed. Maybe a competitive real estate market would see home prices fall and rents rise in the short run, followed by the reverse in the long run towards a stable long run equilibrium where homes acted more like income-generating bonds with little or no (real) price appreciation: a type of asset for a particular class of buyer, rather than the "something for everyone" public policy goal we pursue today. This is likely much closer to the historical norm, particularly in other countries, but the US still wouldn't look like Europe (which I think is the primary fear of housing market subsidy advocates): the abundance of land, capital, and household income here mean we would still have much higher homeownership and square footage per capita rates.Glennnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-43323122566738742482014-12-28T22:33:17.894-07:002014-12-28T22:33:17.894-07:00Thanks Joe.
Regarding your comments about mortgag...Thanks Joe.<br /><br />Regarding your comments about mortgages, I find it helpful to think about home ownership as a cash purchase, then to separately consider the many implications of mortgage debt. I think the conflation of these factors has led to an overestimation of the importance of mortgage rates on home prices, especially since mortgage rates tend to correlate highly with the real long term discount rate one would use to determine the value of a home from the present value of future rents. If all homes were bought with cash, very low long term interest rates would still increase the intrinsic value of homes.<br /><br />The mortgage interest deduction is probably more important for the aggregate market than it is for most individual buyers - acting as a subsidy for a certain class of buyer and pushing up the equilibrium price. But, I don't want to over-sell this. The scale of the effect on price probably isn't huge - well less than 10% probably. But it creates these dislocations in the housing market.<br /><br />But, for an individual buyer, other factors will usually be more critical - how long you will be in the house, your risk aversion, your savings level, your expected income life cycle, etc. Since we usually have to buy real estate in an all-or-none transaction, the obstacle of attaining credit lowers access to the market, so that it is usually beneficial to buy if you have access to mortgage credit. You gain access to excess returns from an inefficient market. The mortgage interest deduction mostly subsidizes these excess returns. The landlord owner market is scalable, so it is probably more efficient. I think it is possible that if we didn't have the deduction, a small decline in prices could push a lot of potential buyers from owning to renting. The owner-occupier price would decline, and the landlord price would bid away the excess return to ownership for some households.<br /><br />Your comment on the homestead exemption is very good. I haven't mentioned that, because I've mostly been looking at relative home values over time, as opposed to looking at the actual trade-off level between buying and renting. But, you're right. That's a significant legal advantage to owner-occupiers.<br /><br />Good points about policy consequences.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-2902969536446854462014-12-28T21:22:47.249-07:002014-12-28T21:22:47.249-07:00I'm following you, too.
I had to think long...I'm following you, too. <br /><br />I had to think long and hard about the trades on the margin between renting and home ownership. After much thought, I figure all the additional expenses I have as a home owner, such as maintenance, taxes and insurance to protect the structure, are included in the price of the rent that a landlord would charge a renter for a single-family home like mine. <br /><br />With that realization, I conclude that the short-term economic incentives are clearly in favor of home ownership, considering the mortgage interest deduction first, and the distant second benefit of the homestead exemption on state and local taxes that likely wouldn't be priced into rent I would pay as a renter. The only economic incentives I could identify for a renter are in unique situations: (1) an existing long-term renter in an area with rent control, or (2) a transitory living arrangement that through renting avoids transaction costs associated with the sale of a home (real estate commissions, closing costs, etc.). <br /><br />As an aside, I’m wondering about the analogy you are making with owning a home with a mortgage to holding a bond, the latter of which pays a return during the life of the bond. Wouldn’t this analogous “return” during the life of the mortgage be the various tax deductions I get as a homeowner, such as the mortgage interest deduction, homestead exemption, and property tax deduction? Or were you thinking of something else? <br /><br />The analogous financial instrument I think of for home ownership is a deferred annuity. I pay for an annuity up front, with the guarantee of an income stream for life later. Paying a mortgage leading to owning a home free and clear provides a future income stream in the rent savings that I would incur otherwise. This is the major factor influencing my choice in choosing home ownership over renting, inspiring me to pay off my mortgage before I retire. Shiller seems to ignore this very important factor in his article.<br /><br />On eliminating the mortgage interest deduction, my biggest policy concern is unintended consequences arising as a result. Twenty-five percent of filers take the mortgage interest deduction, who are mostly young and wealthy households. For example, how many of those 25% would be pushed from itemizing to taking the standard deduction, and thus forgo other deduction incentives such as charitable contributions? (The latter is the number three tax deduction behind the mortgage interest deduction and the deduction for state/local taxes.) <br /><br />Clearly, there is a big challenge in crafting a revenue-neutral change affecting tax rates, the threshold for the standard deduction, etc. that takes into account first-order and reasonable second order effects. But what other unintended consequence might arise as a result of eliminating the mortgage interest deduction, analogous to the unintended consequences that arose from implementation of the mortgage interest deduction itself? Would they be better? Or worse?<br /><br />Thank you for a thought-provoking blog post. I found it from the link from David Henderson’s blog. As my Economics professor, he challenged us to think on the margins, and your post definitely fits that topic.Joe Williamshttps://www.blogger.com/profile/06605783551467412053noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-20519383210601130442014-12-25T21:16:57.892-07:002014-12-25T21:16:57.892-07:00I've wondered that, too Benjamin. Like with E...I've wondered that, too Benjamin. Like with Ed Glaeser's work about the value of cities, if the city grows up around a house, the house becomes more valuable. That must happen, on net, naturally. It all depends on how the hedonic adjustments work with shelter inflation. I don't know anything about that. It does seem like the kind of thing that wouldn't be accounted for.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-72938484281626880992014-12-25T20:04:30.041-07:002014-12-25T20:04:30.041-07:00Great blogging.
And I think you are right---Shill...Great blogging.<br /><br />And I think you are right---Shiller is waaayyyy off base on housing, from the perspective of an individual buying a house.<br /><br />So the house only keeps up with inflation. But if your mortgage is fixed, all that inflation becomes equity! That is, if house prices double in 10 years due to a bout of inflation or appreciation, and you never refi-ed, now you own half the house!<br /><br />Then, as you mention, there is the mortgage tax deduction. <br /><br />If your house is large enough, there are other options, like renting rooms out. <br /><br />The tax code and inflation make buying a house a good move.<br /><br />Side question. For a while, I have been thinking that house prices, as measured overstate inflation.<br /><br />Some housing become more valuable due to location, and that is influenced by where people are moving. So, a 1000-sf condo in Manhattan is worth X, and 10 years later it is worth X+Y.<br /><br />Simple to say, "Yes, inflation."<br /><br />But the buyer is getting more for their money, even in this extreme case. They are closer to desired amenities, work, other people they like. The condo-buyers get status--and people pay for status, if you think not explain luxury brands. <br /><br />And there is something about people with rising incomes competing against against for the limited high-status housing stock. <br /><br />All this is my longwinded way of saying I think the CPI overstates housing inflation. <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-75166284618147186732014-12-24T11:56:18.701-07:002014-12-24T11:56:18.701-07:00Thanks Ken.Thanks Ken.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-28262088083163504512014-12-24T08:33:48.261-07:002014-12-24T08:33:48.261-07:00I'm still hanging with you. Thank you for tak...I'm still hanging with you. Thank you for taking the time to write up your thoughts. You think about this stuff more clearly than any other source I've found. Sometimes I wish there was a way to take people like you and let them write the rules.<br /><br />Thanks,<br /> -Ken<br /><br />Kenneth Duda<br />Menlo Park, CA<br />Kenneth Dudahttps://www.blogger.com/profile/10593455504357461005noreply@blogger.com