Introduction
The government of the United States of America spends approximately $100 billion per year to subsidize American homeowners. Renters often don’t get breaks, but homeowners get them. The mortgage rates of homeowners are subsidized through the use of government-sponsored enterprises such as Freddie Mac and Fannie Mae. This is realized through giving them a tax deduction on federal, local and state income taxes for mortgage interest rates payments. Homeowners are also given favored treatment on their capital gains from the sale of a primary residence. Americans are fond of the idea of houses and white picket fence. The government, therefore, encourages homeownership using housing subsidies with the belief that it will stabilize communities. Homeowners consider their homes as part of their American dream as well as the best way of saving money. Congressional Joint Committee on Taxation argues that the tax breaks given to homeowners result in wastage of government revenue. As government, therefore, struggles to initiate revenue sources and spending cuts, housing subsidies is the obvious place to consider (Acharya, Richardson, Nieuwerburgh, and White, 2011).
Should home ownership be subsidized?
There have been several economic arguments on whether or not to subsidize home ownership. Economists have justified tax subsidies on home ownership on the following two grounds: It gives homeowners financial investment in their neighborhoods hence giving them with responsibility to work and maintain and also to enable homeowners to accumulate assets. This will, therefore, give them a higher saving and greater security when there is a fall in income as during job loss or retirement.
Support of home ownership has hitherto been considered untouchable because it was considered a popular program with the voters and due to the unrelenting efforts of lobbyists. The political left used the idea as a policy to fight rising income inequality while the political right considered the program as an ownership society. This has not, however, been the case, and it has turned to be a major disappointment. Encouraging home ownership is considered the cornerstone of the domestic policy of the United States of America. Furthermore, home ownership is a critical goal for most American people. This is because home ownership is an affirmation of families being part of the middle class while for other families; it is an indication of asset accumulation. The popularity of home ownership is an enough explanation as to why political leaders have often pursued policies aimed at expanding home ownership (Slivinski, 2008).
Housing market in United States
When compared with other developed countries, United States is in the middle of the pack; this is an indication that subsidizing homeworkers with tax breaks is an unnecessary and insufficient condition for the lucrative housing market. Subsidizing homeworkers has encouraged people to borrow more money than they can afford in order to buy big houses than what they could afford; this has resulted in housing price bubble. The subsidizing policies made people to leverage on real estate, and this turned sour because of price bubble that was associated with the economic depression of 2008 (Retsinas, & Belsky, 2002).).
Housing market is considered to be very inefficient. The government has massively subsidized the sector with the notion of assisting regular buyers; this instead has not been the case but the contrary. This is because the financial structure that the government went from real estate market in free fall to one that is highly subsidized through low rates has caused investors to crowd regular buyers. Housing prices have now surged while the rate of homeownership has fallen. The housing market is becoming inefficient due to heavy subsidy for homeownership when in the reality families are better off renting that buying. Subsidizing is only handing profits to banks and other Wall Street players while impoverishing the citizens (Dr. Housing Bubble, 2014).
The government efforts to provide subsidy to home owners has caused and exacerbated the financial crisis; it has left taxpayers with billions of dollars in form of liability due to dubious mortgages. Although experts concede that the homeowner subsidy has had negative economic impact, they agree that there is need to preserve it since it epitomizes the country’s national identity.
Opposition to home ownership subsidy
Homeownership should not be subsidized. This is because mortgage subsidies and ownership policies in the United States of America have turned out to only benefit the rich more than the poor. This policy has, therefore, served to increase income inequality gap instead of its objective of reducing it. The government should instead wind down Fannie Mae and Freddie Mac and also scale down subsidies for homeownership. Instead of subsidizing homeowners, the government should focus on long term programs like rental assistance for the poor because they are on a budget and are housed on federal housing administration. The costs of this program are transparent to taxpayers.
Those opposed to a housing subsidy argue that the program is embedded in the economic system and eliminating it will disrupt the economy. They argue that housing subsidy has empowered the middle class, and it has become a major ingredient of sustaining the middle class through enforcing savings equity in their homes. There is, however, progressive ways of managing the program as limiting tax breaks and subsidies on second homes. Despite the disagreements about the program, subsidizing homes is still considered as a necessity. There is strong evidence suggesting that subsidizing home ownership will be good for families and also the country. Home ownership is considered a ticket to the middle class, and if the government intends to narrow the gap between the rich and the poor, then t is through providing home subsidy that is a critical part of economic rationale (Shiller, 2013).
Economic impact of home ownership subsidy
Introduction of the above housing policy will completely change the economy. When subsidies on the housing sector are removed, American households will be exposed to less debt hence resulting in minimal overconsumption, in housing. This will result in the private sector shifting its investment from the real estate sector to other sectors of the economy that offer a high returns such as infrastructure projects, human capital and other capital investments. This will have a tectonic economic impact that can result in high economic growth and a stable financial system (Shiller, 2013).
Government support for home ownership
The government strongly encourages home ownership because it considers it a national goal since the introduction of the policy “Own Your Own Home Day” in the year 1920. This was an idea of the civic groups and part of the National Thrift Week. This made homeownership a popular idea and goal for every citizen. Home ownership was considered to encourage discipline, community spirit, permanency and planning. Following the sublime mortgage crisis, the government’s commitment to homeownership was questioned in light to Freddie Mac and Fannie Mae, the enterprises aimed at increasing money supply for mortgage purposes and that are under government conservatorship. To promote home ownership, the government through the Federal Housing Administration that subsidizes home ownership directly and the Federal Reserve’s quantitative easing program, intended to reduce the interest rates. Home subsidies have taken both economic and political reasons, and hence the mention for mortgage reduction has been sharply curtailed.
The government support towards home ownership in United States of America has proved to be a market crash, a housing bubble and a weak recovery. This policy has also led to an economic recession. It has not promoted personal well-being as anticipated. Encouraging home ownership has enabled the government to reduce the willingness and the ability of people and laid off workers to look for new jobs. The program of home ownership subsidy has only served to benefit the rich and the middle class hence, increasing income disparities. The nation can, therefore, be better placed to invest their income in better economic opportunities like the export industry. The government backs the proposal as a measure of increasing the ease of house rent in America. With the projection that housing prices will go higher not likely, the notion that rent payment is a waste of money no longer hold on Americans. The government should instead allow the free market to decide the buying or renting as opposed to cushioning people with guarantees and mortgage subsidies (Slivinski, 2008).
Conclusion
The United States of America is in dire economic problems’ this has made the country’s economy anemic. Reforming the housing system will serve to enhance the budget and stimulate economic growth hence making huge contribution to the future property of America. The federal government has, for decades, subsidized homes. This has also happened during a financial crisis with institutions like Freddie Mac and Fannie Mae facilitating the housing market by guaranteeing investors with new mortgages. There is little doubt that subsidizing home ownership inflates housing prices; there is also mounting evidence that the program does very little to increase the rate of homeownership among the people.
References
Acharya, V, Richardson, M, Nieuwerburgh, S and White, L. (2011). White Picket Fence? Not So Fast. Retrieved on 26th March 26, 2014 from: http://www.nytimes.com/2011/08/17/opinion/why-we-should-end-homeownership-subsidies.html?_r=0
Dr. Housing Bubble. (2014). The inefficient and fragile housing market: How trying to increase homeownership can backfire and add costs to regular home buyers. Retrieved on 26th March 26, 2014 from:
http://www.doctorhousingbubble.com/inefficient-fragile-housing-market-fed-qe-subsidy-housing-market-government-shutdown-real-estate/
Retsinas, N. P., & Belsky, E. S. (2002). Low-Income Homeownership: Examining the Unexamined Goal. Washington: Brookings Institution Press.
Shiller, R. (2013). Owning a Home Isn’t Always a Virtue. Retrieved on 26th March 26, 2014 from:
http://www.nytimes.com/2013/07/14/business/owning-a-home-isnt-always-a-virtue.html?_r=0
Slivinski, S. (2008). House Bias: The economic consequences of subsidizing homeownership. Retrieved on 26th March 26, 2014 from:
http://www.richmondfed.org/publications/research/region_focus/2008/fall/pdf/cover_story.pdf
