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USA Real Estate Blog

Homeownership and the Warren Housing Bill

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Elizabeth Warren’s housing bill has received a lot of love from those who favor of land use liberalization. Like Cory Booker’s housing bill, the Warren bill would seek to encourage state and local land use reform using federal grants as an incentive. Warren’s bill would significantly increase funding for the Housing Trust Fund and provide a small increase in allocations for public housing maintenance. However, Warren’s bill also includes new subsidies to homeownership and policies that could reduce the production of new renter-occupied housing relative to owner-occupied housing.

There’s a trade off in housing policy between promoting homeownership as a wealth-building tool and promoting affordability that politicians, including Warren, have failed to confront.

Rather than promoting housing affordability by rolling back policies that subsidize homeowners at the expense of renters, Warren’s bill seeks to reduce exclusionary, suburban zoning at the same time it introduces new policies to incentivize homeownership.

First, Warren’s bill would require most foreclosed homes to be sold to new owner-occupants, rather than to landlords who would rent them out. The intention of the bill is to prevent institutional investors from profiting from foreclosures, but this approach has a strong anti-renter bias. When changes in economic conditions, demographics, or preferences lead to an increase in the proportion of Americans who want to rent rather than own, this policy would stand in the way of homes being adapted to meet new needs.

Second, the bill would provide down payment assistance to first-time homebuyers who live in, or were displaced from, historically redlined neighborhoods. All levels of government have played horrific roles in excluding minorities from white neighborhoods and subsidizing wealth-building through home equity for white households alone. The victims of these policies deserve to be compensated for this unfairness. The Justice Department and the Department of Housing and Urban Development have reached a number of settlements with banks that have discriminated against minority borrowers, but the federal government has not offered settlements to the victims of their long history of racist housing policy.

Rather than attempting to increase the number of minority households that can now benefit from unfair government subsidies to homeownership, these subsidies should be repealed entirely, and damages for the victims of housing policy discrimination should not be tied to home buying. The Warren approach offers nothing to households that decide to rent instead of buy.

Lastly, one way that localities could qualify for grants under the Warren bill is by implementing rent stabilization or rent control. These policies benefit the renters who are able to take advantage of them, but they also encourage the conversion of rental housing to owner-occupied housing, and inadvertently reduce the supply of rental units available to lower income households. One study of the effect of rent control on housing in San Francisco found that rent controlled buildings were eight percentage points more likely to be converted from rental buildings to condos relative to similar market-rate rental buildings. Moreover, rent control reduces the pipeline of aging buildings that can profitably be converted to inexpensive rental units. This has historically been the primary source of affordable housing for working Americans.

Rather than creating new policies that support owner-occupied housing, pro-affordability legislation should repeal current subsidies to homeownership. The federal government provides huge subsidies to homeowners through tax policy. Following a substantial reduction to the mortgage interest deduction in the Tax Cuts and Jobs Act, the deduction still costs $37 billion annually. Additionally, investing in an owner-occupied home is privileged relative to other investments because single people can sell their homes with up to $250,000 in untaxed capital gains, or up to $500,000 for married couples. More than 70 percent of mortgages are either issued by the Federal Housing Authority or are insured by a government-sponsored entity, increasing access to mortgage credit relative to what a private market would provide. These privileges encourage people to store their wealth in the homes that they live in, in turn increasing their incentives to protect and inflate their homes’ value, and, perversely, to oppose new development close to where they live.

Economist William Fischel coined the term “homevoters” to refer to homeowners because of their tendency to vote with a single-issue focus for policies that reduce the risk of home prices falling and increase home values in their jurisdiction. Federal incentives that benefit homeowners translate to increased support for land use regulations at the local level that reduce housing supply, prop up home values, and reduce housing affordability for anyone who doesn’t already own.

Additionally, federal policies to support homeownership have an anti-density and anti-urban bias. As economists Ed Glaeser and Jesse Shapiro write, “There are few facts in urban economics as reliable as the fact that people in multi-family units overwhelmingly rent and people in single-family units overwhelmingly own.” As of 2017, only 18 percent of single-family homes are renter-occupied. All multifamily typologies, from duplexes to large multifamily buildings, are majority renter-occupied by wide margins. By focusing on homeownership, Warren diverts market-rate construction from more affordable units to exclusive, detached homes. Warren has made clear she doesn’t want to reduce house price appreciation as a wealth-building tool. Her bill states:

A home is not only a place to live, but also an asset that may appreciate, help fund a new business, finance an education, or cover retirement expenses. A home provides stability and financial predictability, which are important foundations for prosperity and access to opportunity for a family.

However, rising house prices that benefit homeowners come at the expense of renters, who tend to be lower-income and who are more likely to be minorities. A more visionary approach would reconsider the federal government’s role in encouraging policies that intentionally increase the price of homes and consider the negative effects this policy has had on the housing market as a whole.

While the use of federal grants in Warren’s bill may help reduce exclusionary zoning, it’s other provisions would reduce the supply of rental housing. It would expand federal subsidies to homeownership, further entrenching homevoters as a powerful force in favor of exclusionary zoning at the local level. The incentives it creates to increase housing supply are welcome, but overall it would shift federal policy toward homeownership further in the wrong direction.

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