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Harvard economist Edward Glaeser makes no bones about his love for cities, and energy-efficient apartment buildings in particular.In his new paper, “Rethinking the Federal Bias Toward Homeownership,” he writes that the government is pushing families out of city dwellings and into the suburbs through its home mortgage policies.
This is troubling for several reasons, the first of them being that the home mortgage interest deduction has put Americans on a path to debt, not prosperity. The old-fashioned idea that you buy a house, watch its value gradually rise, then pay off the mortgage over time evaporated in the recession, he says.
“The volatility of the housing market over the past 4 years has clearly illustrated that housing prices go down as well as up,” Glaeser writes. “In general, the Americans who bought houses during the boom have lost money and are now in far worse financial shape than if they had not bought. The asset accumulation approach will only operate effectively if we are confident that homes are likely to increase in value over time.”
In spite of dropping prices, homeowners can still amass wealth if they pay down their mortgage. However, the government incentivizes us to draw value out of our homes with a second mortgage which is making this harder to do, Glaeser says.
“At the extreme, the interest deduction encourages people to have the maximum possible loan-to-value ratio, which ensures that they will have little wealth accumulation and great risk regarding changes in home values,” he says.
The same applies when homebuyers are asked to cough up a down payment and the government offers to subsidise it. In giving prospective buyers more leverage to afford a home, Glaeser argues that the government removes the incentive to save and if anything, encourages us to not save at all:
“Altogether, it’s hard to see the home mortgage interest deduction as a sensible way to encourage Americans to accumulate wealth.”