The Value in Not Jacking Up the Price of Housing for the Rest of Us


December 05, 1991|By TRB

WASHINGTON. — Washington--"Of course, statistics paint a sobering picture,'' said President Bush in his Thanksgiving Address: ''unemployment, tight credit, lower home values. . . .'' Whoa. Stop right there. What's wrong with lower home ''values''? Just a couple years ago, there was national anguish over soaring prices that were making home ownership unaffordable. Yet now that prices are coming down, politicians of both parties propose government action to shore them back up.

There also are growing calls for the government to reverse the decline in commercial real estate. Mr. Bush offers this as the latest reason to support his treasured capital-gains tax break: it ''would raise real estate prices and cut the overall cost of the savings and loan cleanup,'' he says.

The National Association of Realtors Housing Affordability Index stands at 118.8, meaning that the median family income is about 20 percent higher than necessary to afford the median-priced house. In 1989 the index was at 108.9. It's significantly easier to afford a house today than it was three years ago. You'd think that would be good, not bad. In the Northeast and the West, the index is still below 100, meaning that the typical family can't afford the typical house.

To be sure, the politics of higher house prices are hard to resist. Most voters already own homes, which are their largest financial asset. A dour financier noted recently in the Wall Street Journal that household net worth declined last year for the first time since World War II. Falling house prices were the main reason.

But the benefits of higher prices are largely illusory, for the country and even for the homeowners themselves. The country does not become richer in any real sense when the exact same stock of buildings and land trades at a higher price. As for the individual homeowners, most are going to be living in their houses for many years. Either that or they are going to trade for new houses, probably bigger ones. What do they actually gain from higher house ''values''?

It is only human nature to speculate obsessively on what your house may be ''worth.'' (I do it too.) But the truth is that once you are in the housing market, its general fluctuations matter little to you. The exception is older people who are selling out for good. But these people have generally enjoyed huge runups over their lifetimes. They don't need sympathy over a slight decline toward the end.

The remedies now proposed for low house prices -- allowing IRA accounts to be spent on down payments, raising the ceiling on FHA mortgages -- are the same ones proposed a few years ago to help buyers afford high house prices. But to the extent that such breaks help home owners, by raising ''values,'' they don't help home buyers. In fact, special breaks for homeownership don't really make homes more ''affordable.'' The value of the break simply gets transmuted into higher prices.

The economics of government policies to raise the price of commercial real estate are even more futile. Especially comic is Mr. Bush's idea that the government can save money on the S&L bailout by cutting the capital-gains tax. It's true that the S&L fiasco has left the government holding vast acreage of devalued real estate. But any increase in real-estate prices due to a tax break would simply reflect the future tax savings. The government cannot possibly come out ahead by giving such a break to all real estate because it happens to own some real estate itself.

A big part of the real-estate industry's problem today is the huge overbuilding that took place during the 1980s. And a big reason for that was artificial incentives for development enacted in 1978 and 1981, including an enlarged capital-gains break. The 1986 tax reform closed most of these loopholes. Now the Bush-endorsed House Republican tax plan proposes to reopen them.

A developer recently wrote to President Bush urging new tax breaks for real estate. He got this answer from a Treasury official: ''Neutral taxation promotes the efficient allocation of investment resources, while the ability to use numerous tax incentives available for real estate prior to the 1986 Act had the opposite effect, the result of which was substantial overbuilding, one of the primary causes of the savings and loan crisis.'' A clearer case against Mr. Bush's own tax break agenda would be hard to compose.

All government subsidies to this and that form of economic activity are inherently suspect, but real-estate subsidies are especially so. Land is a dead asset. A subsidy to, say, computer chips will at least produce more computer chips. A subsidy to land will not produce more land; it will just produce higher prices. Subsidies to buildings may produce a few more buildings. But at any given time, practically the entire real estate market, unlike the market for other products, consists of pre-existing stock. Most of any subsidy simply raises the price of this stock.

Real-estate interests are politically powerful in both parties. Along with Hollywood, they're about the only class of rich people the Democrats have got. Add the nervousness of homeowners and you've got an intoxicating political brew. But if the politicians succumb, the real economy will suffer.

TRB wrote this commentary for The New Republic.

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