Miércoles 19 de Diciembre de 2007, Ip nº 221

Is homeownership bad for America?
A look at some news from around the Web:

Why Homeownership may be bad for America: In a column in the December issue of the Atlantic Monthly, Clive Crook looks at some of the downsides to homeownership. He says that it can place a drag on worker mobility and, more significantly he says that homeownership places a strain on the economy in the form of the mortgage interest deduction, “one of the quieter causes of the housing bubble.”

Crook writes, “The current deduction costs nearly $80 billion a year in forgone federal revenues. It is available only to the minority of households — typically affluent — that itemize their taxes. Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership. What it does promote, studies show, is spending on housing … Prices are higher than they would otherwise have been, and mortgages are bigger. As many owners have learned abruptly, this can worsen economic insecurity.” (Warning: subscription required to view full story.)

Cash is the best lure: “Buyers have become more educated and they can easily cut through the fluffy incentives,” says John F. Wasik in a Bloomberg.com article. Mr. Wasik notes that about 2 million homes may fall into foreclosure this year and that living near such a property could slash as much as $5,000 from your house’s value. In many markets, homeowners should offer an asking price that’s at least 10% below the competition, he says. He points out that in Boston and in Calif.’s Orange County and Sacramento, prices of more than half of the homes on the market have already been reduced.

Subprime crisis could cost New York $10 billion: The New York metro area stands to lose $10.4 billion in 2008 gross metropolitan product, according to a report from the U.S. Conference of Mayors reported by Crain’s New York Business.

More on this topic:

How Homeowners Hurt the Economy (November 28, 2007; The Wall Street Journal Online)

Widespread homeownership has proven benefits for the nation but the Atlantic’s Clive Crook says it brings some serious economic drawbacks with it. Citing research from Warwick University economist Andrew Oswald, Mr. Crook says the main problem with homeowners is that they are less mobile than renters. Less willing to leave their homes for greener pastures when the local economy falters, homeowners slow the nation’s economic growth and exacerbate unemployment issues by staying put. Communities of homeowners also often suppress new development by calling for new zoning rules.

On the plus side, homeowners are more invested in their communities, more likely to vote and work harder to improve their neighborhoods, but the overall societal good in homeownership isn’t clear-cut, Mr. Crook says. To that end, he questions the wisdom of the mortgage-interest tax deduction, a subsidy set up to ostensibly encourage widespread homeownership.

Mr. Crook said the deduction often promotes over-borrowing and higher spending, thus artificially increasing home values and placing borrowers in greater financial risk during downturns, such as the current housing market crunch. On a broader level, higher investments in housing – fueled by the tax deduction — come at the expense of investments in areas that expand the economy, such as commercial building and spending on business equipment, he says. — Troy McCullough

  28/11/2007. The Wall Street Journal Online.