Thursday, March 19, 2009

Subsidized Home Ownership

The people of the United States seem to be in love with the idea of home ownership. We call it the "American Dream". The government does a lot in order to help people reach this dream. It provides massive tax incentives, and it subsidizes home mortgages through institutions like Fanny Mae. There is no doubt that these incentives distort the proportion of individuals who own their own homes. This distortion is generally justified by making the assumption that home ownership generates positive externalities. 
The validity of this argument is questionable. I am somewhat concerned about the spurious relationship that is sure to exist between home ownership and negative factors, such as crime. This skepticism seems to be justified to some extent. However, even if these externalities exist, there is no doubt that the subsidies distort the market.
The Economist just published an article regarding home ownership and its effects on labor mobility. Home ownership makes it more costly for individuals to move from one area to another area. As would be expected, if something becomes more expensive, people do less of it. Because of this, some people will become less mobile than they would have been otherwise. This lack of mobility will make it harder from workers to move from less productive jobs to more productive ones. 
If the market was allowed to function normally, the reduction in mobility caused by home ownership would not be an issue. People making rational choices to give up mobility for owning their own homes is a reasonable choice. However, when we subsidize home ownership there will be a sub-optimal level of mobility in the labor market. The question that would need to be answered is, do these negative mobility factors outweigh the positive externalities, if they exist, that the subsidies provide? 

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