Stop Subsidizing Surplus Construction

National Initiative 1

Who pays for all this "growth?" Why, we all do ... in more ways than one.

Who pays for all this “growth?” Why, we all do … in more ways than one.

According to the 2010 u.s. Census, America has 115 million households. But it has 132 million houses. Which means just under 13 percent of America’s housing stock – 17 million units – is vacant.

Now, this would make perfect sense if the American population had declined by anywhere near 17 percent over the last 40 or 50 years. But it hasn’t; in fact, it’s grown by that much.

And it would make perfect sense if there were some mechanism in place to help correct this.

But there isn’t.

In fact, there’s a huge mechanism in place to make it worse. And it costs the U.S. government between $60 billion and $100 billion a year.

It’s the home mortgage interest deduction. By making the entire value of interest you pay on the mortgage for your residence, it encourages you to go big when you go home.

The program was designed to encourage home ownership. This is because it’s an article of faith in American public policy that home ownership is a vital part of healthy communities.

I wouldn’t necessarily disagree with that premise; people who own their homes are more likely to keep them up and improve them than landlords are. They become stakeholders of some degree of permanence, investing their own equity in the community.

What’s disputable, though, is whether the home mortgage interest deduction actually increases the rate of home ownership. Canada and the United States have almost the same rate of owner-occupied housing. Yet Canada offers no mortgage tax deduction.

What’s indisputable is that the U.S. home mortgage deduction encourages people to buy more expensive housing. It’s also indisputable that it provided most of the air that filled the real estate bubble from 1996 to 2007. It’s important to realize that the law of supply and demand is actually the law of supply, demand and price. By instituting an incentive that influenced price, the government encouraged oversupply.

This was promoted by the fact that, somewhere along the line, we began to look at “new housing starts” as a key economic indicator. I’m of the belief that this is partially the result of advocacy by the home building and real estate development industries. After all, it’s intuitive to think that if we’re developing new property, building and buying new homes, it’s a sign of a robust economy.

But it’s actually a sign that the economic strength of other industries – most notably agribusiness – have declined to the point that their real estate can no longer generate income; that we’re spending billions of dollars to create excess and redundant infrastructure while the roads, bridges and sewers we have are crumbling, and … well, follow the money to see who really benefits.

In 2008, we all saw the result – and we saw who bears the brunt of the effects most sharply. Our cities.

In America’s urban core cities – the industrial heartland in places such as Saginaw, Flint, Pontiac, Detroit, Lansing, Grand Rapids, Jackson, Bay City – housing stock is, on average, at least 75 years old or older. These are cities that were built up during the growth in American industry from 1900 up through the 1960s and ’70s. And they are cities that were increasingly abandoned from the ’70s on.

Many Republicans (and most Libertarians) want to completely eliminate the home mortgage interest deduction, if for no other reason than it helps simplify the U.S. tax code. It is currently on the chopping block of the House Ways and Means Committee’s draft tax reform legislation.

And if I had to choose between getting rid of the deduction altogether or changing nothing at all, I would say eliminating the credit will do more to help urban America.

However, if we are serious about reinvesting in our cities, we should consider an alternative: tie the deductibility of the mortgage interest to the age of the house.

For example:

  • Joe builds a brand-new house in a suburb. His mortgage interest is not deductible at all.
  • Bill buys a 110-year-old house in the city. His mortgage interest is 100-percent deductible.
  • Dave buys a 75-year-old farmhouse in the country. His mortgage interest is, let’s say, 75-percent deductible.

There are many ways to establish a formula for deductibility; each would use the age as recorded in the municipal government’s assessor’s records.

This shift would accomplish four important goals:

  1. It would reduce, by more than half, the actual dollar cost of the deduction to the U.S. Treasury. It’s not as good as completely removing it, but it’s a start.
  2. It would slow the growth of surplus housing. Needless to say, home builders, among others, are heavily invested in creating that surplus. But it’s important to remember that rehabilitation and remodeling of existing buildings is more labor-intensive, and new construction is more material-intensive. Dollar for dollar, rehabbing and remodeling creates more jobs and keeps more money in the local economy.
  3. It would reflect the higher investment necessary to maintain older homes (and create those jobs for builders). Absent a federal historic preservation tax credit on owner-occupied residential properties, there is no financial incentive for homeowners to invest in buildings that are already here. And while the construction industry may dispute this, there are significant economic and environmental benefits in investing in buildings that already exist This would help provide a greater incentive to do it.
  4. Our cities will not survive without a reversal of the disinvestment of the last four decades. No one single activity would spur urban homesteading like this one. It would create a wave of urban residential reinvestment that we have not seen since the 1920s.

 

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