Green Prudence: Economics of Housing Full of Inequality

by Roger Markovics
The Albany Times-Union
October 14, 2007

The problem of empty buildings that are seemingly abandoned (but are almost privately owned) has grown to huge proportions in Albany in recent years. It's a problem common to most major cities and is not new.

Side-by-side with this phenomenon is the rapidly worsening problem of the lack of affordable housing for increasing numbers of working people. Obviously, something is very wrong when these problems fester simultaneously.

The economics of our housing system seem to work so well for the affluent that we tend to blame those of us earning less. This rings hollow once we take a much closer look at how this set of economic conditions has evolved.

Traditionally, a house has been primarily a home, a comfortable place to raise a family and a refuge from the rest of the world. An important part of what makes a home comfortable and secure is its affordability, including both the cost of initial acquisition and the build-up of equity over time.

This equation has shifted considerably as the development of equity has become paramount. Government-support programs have been scaled back or eliminated in favor of individual asset building and wealth creation as the alternative.

The results: Declining job security? Rely on home equity. Pension plans replaced by riskier stock market programs? Cash in on your home equity. Government safety-net programs dismantled? Tap the asset you've developed in your home. Health insurance inadequate? Use that home equity. College costs rising? Take out a home equity loan.

Because we rely on home equity, we don't want the poor living nearby; that threatens the value of our homes. Meanwhile, free-market gurus tout personal wealth creation in a philosophy of individual self-reliance that blames those of us earning less for not being able to make it.

But it's not natural law. All economic systems are man-made, and very flawed. Invariably, those who have prospered in any economic system use their success to engineer controls that reinforce and amplify their wealth. And the economics of our housing system are particularly insidious and unfair.

Case in point: the disparity between hidden subsidies for the upwardly mobile and inadequate subsidies for the rest of us. Compare home mortgage interest and property tax deductions on federal income taxes with the budget for the U.S. Department of Housing and Urban Development. For decades, the annual cost to the U.S. Treasury of the mortgage interest and property tax deductions has been approximately three times the annual congressional appropriation for HUD. Affluent property owners are the primary beneficiaries of these tax deductions, while the HUD budget is focused primarily on low-income tenants and homeowners.

Look closer: Who gets the home mortgage interest tax deductions? Every homeowner who takes out a mortgage is eligible, regardless of income or location. What is the maximum amount of the home mortgage interest tax deduction? The sky is the limit, including trophy homes.

And compare: Who gets a subsidy through a HUD program and how much? Eligibility requirements are based on strict income guidelines, requiring up-to-date proof of income and identity of all household members, all of which is verified annually. Moreover, only about a third of the low-income population nationwide actually receives HUD subsidies because congressional appropriations are too low to meet more than a fraction of the need.

A double standard? Absolutely. Unfortunately, we don't recognize it because it's cloaked in rhetoric about the poor and bootstraps, and pseudo-economic jargon about the unfairness of taxing the affluent because it would be a disincentive to work hard and after all they "earned" it.

Is this an anomaly? Other hidden subsidies that reward the affluent at taxpayer expense are embedded in the interstate highway system, restrictive zoning and building codes, and New York's funding for school systems that helped create and maintain suburban communities.

Economists and policymakers emphasize wealth aggregation without examining whether wealth is actually created or just transferred. Tax revenues could be better spent in creating a stronger safety net for economic security (including affordable housing). It is up to us, as a civilized society, to see that their collection and use are truly equitable for all in our community.