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Rethinking U.S. Federal Housing Policy

+ Brandon Fuller

Edward Glaeser has long argued that inefficient rules keep America’s urban areas at less than optimal densities. The issue is important because cities tend to be the engines of national economic growth. By limiting access to cities, ill-advised housing policies may put a damper on broader prosperity. The distortions tend come in two varieties:

  1. Local barriers that prohibit multiunit dwellings (for example, suburban zoning strictures or overzealous historic preservation in cities) thereby restricting the supply of housing in and near cities, and
  2. The home mortgage interest deduction and other pro-homeownership policies that deter people from living in densely settled areas.

At first glance, the notion that the home mortgage interest deduction reduces density in American cities might seem puzzling. A family buying a condo in the city can just as easily capture the subsidy as another buying a house in the suburbs. Why should a subsidy for homeownership create a bias toward single family detached homes in less-dense areas relative to owner-occupied condos in densely settled cities? In a recent paper, “Rethinking the Federal Bias Toward Homeownership,” Glaeser lays out the explanation.

He points out that ownership is tightly tied to structure type in the U.S. More than 85 percent of single-family dwellings are owner occupied, whereas less than 15 percent of dwellings in buildings with more than three units are owner occupied.

In general, ownership should be lodged with the agent who is in the best position to make investments and, in the case of a single-family detached house, that agent is the resident. In a multifamily dwelling, occupants share infrastructure and often lack any comparative advantage in investing in a roof or a boiler. Moreover, multiple owners make coordination costly, so renting, rather than owning, comes naturally to residents in bigger structures.

Because homeownership subsidies implicitly subsidize single-family detached dwellings, they discourage higher-density living in urban areas.

This is one of many excellent points in a paper that makes as thorough and convincing case for housing policy reform in the United States. Hat tip to Ryan Avent for the link.

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