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Housing and the Financial Crisis

Conventional wisdom held that housing prices couldn’t fall. But the spectacular boom and bust of the housing market during the first decade of the twenty-first century and millions of foreclosed homeowners have made it clear that housing is no different from any other asset in its ability to climb and crash.

Housing and the Financial Crisis looks at what happened to prices and construction both during and after the housing boom in different parts of the American housing market, accounting for why certain areas experienced less volatility than others. It then examines the causes of the boom and bust, including the availability of credit, the perceived risk reduction due to the securitization of mortgages, and the increase in lending from foreign sources. Finally, it examines a range of policies that might address some of the sources of recent instability.

Housing and the Financial Crisis, with Edward Glaeser, University of Chicago Press
(forthcoming 2013).

Safety in Renting

A recent decline in the home ownership rate raises the possibility that people now realize that home owning is too risky for some. However, we should not forget that renting also is risky for others. This article outlines two sources of risk that owning avoids and renting does not – by owning, low-mobility households can lock in their housing costs and all households can hedge themselves against changes in the cost of housing from moving – and a source of risk that renting avoids: Uncertainty over the sale price of a house. The article shows which kinds of households would best avoid risk by choosing renting, or owning. The recent decline in the home ownership rate does not appear to be driven solely by natural renters returning to renting, and the article issues a challenge to landlords to find ways to make renting less risky for natural owners.

Safety in Renting , Wharton Real Estate Review(2012) (PDF)

Understanding and Mitigating Rental Risk

The decision of whether to rent or own a home should involve an evaluation of the relative risks and the relative costs of the two options. It is often assumed that renting is less risky than homeownership, but that is not always the case. Which option is riskier depends on the risk source and household characteristics.
This article provides a framework for understanding the sources of risk for renters. It outlines the most important determinants of risk: volatility in the total cost of obtaining housing, changes in housing costs after a move, and the correlation of rents with incomes. The article characterizes the magnitudes of those risks and discusses how the effects of risk vary across renter types and U.S. metropolitan areas. In addition, the article shows that renters spend less of their cash flow on housing than do otherwise equivalent owners and, thus, are better able to absorb housing cost risk
This article provides a framework for understanding the sources of risk for renters. It outlines the most important determinants of risk: volatility in the total cost of obtaining housing, changes in housing costs after a move, and the correlation of rents with incomes. The article characterizes the magnitudes of those risks and discusses how the effects of risk vary across renter types and U.S. metropolitan areas. In addition, the article shows that renters spend less of their cash flow on housing than do otherwise equivalent owners and, thus, are better able to absorb housing cost risk

Understanding and Mitigating Rental Risk , Cityscape vol.13, number 2 (July 2011) 105-125 (PDF)

Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing

We analyze how changes in the income tax deduction for mortgage interest would affect loan-to-value ratios on owner-occupied homes, the distribution of income tax liabilities, and the consumption of housing services. Using the 2004 Survey of Consumer Finances, we estimate that repealing the mortgage interest deduction in 2003 would have raised federal and state income tax revenues by $72.4 billion in the absence of any household portfolio adjustments, but by only $58.5 billion if homeowners drew down financial assets to pay down their mortgage debt.

Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing with James Poterba, National Tax Journal vol. 64, number 2 (June 2011), 531-564 (PDF)

Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income

Federal income tax policy affects the cost of homeownership for many households. Popular discussions of the favorable tax treatment of owner occupied housing usually focus on the tax-deductibility of mortgage interest and property tax payments, as well as the specialized tax rules that affect housing capital gains. Academic discussions, in contrast, emphasize the exclusion of the imputed rental income on owner-occupied housing as the key tax benefit for homeowners. This paper summarizes the current distribution of the tax benefits associated with the mortgage interest and property tax deductions. It contrasts them with the distribution of tax benefits associated with the current tax regime for imputed rental income relative to one which taxed homeowners as if they were landlords. It also reports how removing either deduction, or taxing homeowners as landlords, would affect the user cost of owner-occupied housing.

Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income with James Poterba, American Economic Review Papers and Proceedings, vol. 96, number 2 (May 2008) (PDF)

Do Low-Income Housing Subsidies Increase the Occupied Housing Stock?

A necessary condition for justifying a policy such as subsidized low-income housing, either via tenant-based rental assistance or construction of public or private projects, is that it has a real effect on market outcomes. In this paper, we examine one aspect of the real effect of subsidized housing—does it increase the housing stock? If subsidized housing raises the quantity of occupied housing per capita, either more people are finding housing or they are being housed less densely. On the other hand, if subsidized housing merely crowds out equivalent-quality low-income housing that otherwise would have been provided by the provate sector, the housing policy may have little real effect on housing consumption. Using both Census place and MSA-level data from the decennial census and from the Department of Housing and Urban Development, we ask whether housing markets with more subsidized housing also have more total housing, after accounting for household demand. We find that government-financed units raise the total number of units in a market, although on average one government-subsidized unit adds only one-third to one-half of a unit to the total housing stock. There is less crowd-out in more populous markets, and more crowd-out in places where there is less excess demand for subsidized housing, as measured by the number of government-financed units per eligible person. Tenant-based housing programs, such as Section 8 Certificates and Vouchers, seem to be more effective than project-based programs at targeting subsidized housing units to people who otherwise would not have their own.

Do Low-Income Housing Subsidies Increase the Occupied Housing Stock? with Joel Waldfogel, Journal of Public Economics vol. 89, number 11-12 (December 2005), pp. 2137-2164 (PDF)

The (Un)Changing Geographical Distribution of Housing Tax Benefits: 1980 to 2000

Even though the top marginal income tax rate has fallen substantially and the tax code has become less progressive since 1979, the tax benefit to homeowners was virtually unchanged between 1979-1989, and then rose substantially between 1989-1999. Using tract-level data from the 1980, 1990, and 2000 censuses, we estimate how the income tax-related benefits to owner-occupiers are distributed spatially across the United States. Geographically, gross program benefits have been and remain very spatially targeted. At the metropolitan area level, tax benefits are spatially targeted, with a spatial skewness that is increasing over time. In 1979, owners in the top 20 highest subsidy areas received from 2.7 to 8.0 times the subsidy reaped by owners in the bottom 20 areas. By 1999, owners in the top 20 areas received from 3.4 to 17.1 times more benefits than owners in any of the 20 lowest recipient areas. Despite the increasing skewness, the top subsidy recipient areas tend to persist over time. In particular, the very high benefit per owner areas are heavily concentrated in California and the New York City to Boston corridor, with California owners alone receiving between 19 and 22 percent of the national aggregate gross benefits. While tax rates are somewhat higher in these places, it is high and rising house prices which appear most responsible for the large and increasing skewness in the spatial distribution of benefits.

The (Un)Changing Geographical Distribution of Housing Tax Benefits: 1980 to 2000 with Joseph Gyourko, Tax Policy and the Economy Volume 18, James Poterba, ed. (2004, Cambridge: MIT Press), pp. 175-208 [Revised version of NBER w10322, February 2004] (PDF)

The Spatial Distribution of Housing-Related Ordinary Income Tax Benefits

We estimate how tax subsidies to owner-occupied housing are distributed spatially across the United States and find striking skewness. At the state level, the mean tax benefit per owned unit in 1990 ranged from $917 in South Dakota to $10,718 in Hawaii. The dispersion is slightly greater when benefit flows are measured at the metropolitan-area level. Even assuming the subsidies are funded in an income progressivity-neutral manner, a relatively few metro areas, primarily in California and the New York–Boston corridor, are shown to gain considerably while the vast majority of areas have relatively small gains or losses.

The Spatial Distribution of Housing-Related Tax Benefits in the United States. with Joseph Gyourko, Brookings Institution Discussion_paper, July 2001. (PDF)

The Spatial Distribution of Housing-Related Tax Benefits in the United States.

Using 1990 Census tract-level data, we estimate how tax subsidies to owner-occupied housing are distributed spatially across the United States, calculating their value as the difference in taxes currently paid by home owners and the taxes owners would pay if there were no preference for investing in one’s home relative to other assets. The $164 billion national tax subsidy is highly skewed spatially with a few areas receiving large subsidies and most areas receiving small ones. If the program were self-financed on a lump sum basis, less than 20 percent of states and 10 percent of metropolitan areas would have net positive subsidies. These few metropolitan areas are situated almost exclusively along the California coast and in the Northeast from Washington, DC to Boston. At the state level, California stands out because it receives 25 percent of the national aggregate subsidy flow while being home to only 10 percent of the country’s owners. At the metropolitan area level, owners in just three large CMSAs receive over 75 percent of all positive net benefits. And within a number of the larger metropolitan areas, the top quarter of owners receives 70 percent or more of the total subsidy flowing to the metro area.

The Spatial Distribution of Housing-Related Tax Benefits in the United States. with Joseph Gyourko, Brookings Institution Discussion_paper, July 2001.

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