Why Subsidize Homeownership? A Review of the Rationales

Why Subsidize Homeownership? A Review of the Rationales

September 6, 2019
Why Subsidize Homeownership? A Review of the Rationales
Homeownership is frequently argued to produce a number
Second, there may be unobservable differences between
of benefits for individuals and society. As a result, subsidies
homeowners and renters that researchers may not be able to
for homeownership—tens of billions of dollars annually—
account for, which leads them to infer causality when it is
are popular among policymakers and the general public.
not present. For example, certain traits or attitudes may lead
This In Focus reviews three main rationales for subsidizing
some people to be both homeowners and community
homeownership and discusses the difficulties economists
activists. Although statistical methods can be employed to
have encountered attempting to establish their existence.
overcome the problem of unobservable differences, the
methods are reliable only if particular assumptions hold,
Rationale #1: Homeownership and
and whether these assumptions hold is often a point of
Positive Externalities
debate.
Homeownership subsidies are most often rationalized on
the basis that homeownership generates positive
A third problem that researchers commonly face in
externalities, also known as spillover benefits. An example
determining causality is the possible existence of an
of a positive externality is the positive effect
interaction between homeownership and the positive
homeownership is believed to have on property values. The
outcome policymakers wish to promote. Take, for example,
theory is that a homeowner is more likely than a renter to
the claim that increased homeownership rates boost
make investments in their home that, in turn, raise the
neighborhood property values. Determining causality is
property values of their neighbors. For example, a
difficult because homeowners may prefer to purchase
homeowner may be more inclined than a renter to paint the
homes in neighborhoods where home values are rising. As
exterior of his or her home, fix a hanging gutter, or remove
with unobservable differences, statistical methods can be
street debris outside his or her house. Although the owner
used to determine causation when such interdependence
may only be seeking to improve the appearance and resale
exists, but, again, particular assumptions must hold for
value of their house, he or she is also positively influencing
these methods to produce reliable results.
the values of surrounding properties (the spillover effect).
Because of these difficulties, a definitive answer to whether
Proponents of homeownership claim homeownership
homeownership produces the purported positive
generates other positive externalities. Homeownership may,
externalities has eluded economists. This limitation,
for example, create neighborhood stability since owners are
however, does not mean that homeownership does not
more inclined to remain in the community for a longer
result in positive externalities that justify housing subsidies.
period of time than renters. Homeowners may also exhibit a
But one could argue that determining cause and effect is
greater degree of social and political involvement due to the
essential to proper policy design. And if homeownership
concern about one’s property value. It is suggested that
does not generate the positive effects some believe it does,
higher rates of homeownership could lead to lower
then the economic justification for subsidization is
neighborhood crime, foster higher youth academic
diminished.
achievement, and lower teen pregnancy rates. By
subsidizing homeownership, the government may be able to
Often absent from the debate over subsidizing
align the interests of individuals with the interests of
homeownership is the possibility that homeownership
society, which results in a more economically efficient
results in negative externalities. For example, the same
outcome.
incentive that is believed to lead homeowners to make
investments that raise surrounding property values—mainly
Economists examining these suggested effects have been
homeowners’ financial stake in their property—may also
able to establish that a correlation between homeownership
lead homeowners to push for local initiatives that exclude
and these positive effects exists, but they have also found it
certain groups of people from their communities. Local
difficult to establish causality (i.e., homeownership causes
zoning restrictions, for example, may be supported by
these positive effects). There are a number of reasons for
homeowners if restrictions prevent the construction of low-
this. First, there may be observable differences between
income rental housing that they fear could affect their
owners and renters that are producing these outcomes.
property values.
Consider the case of youth educational outcomes. Owners
and renters typically differ in terms of income and wealth,
If the positive externalities outweigh the negative
which are likely to be strongly correlated with
externalities, economic theory still suggests that subsidizing
homeownership. If a researcher does not account for these
homeownership to generate socially desirable outcomes
financial differences, they may conclude that
may not be the most efficient remedy. If landscaping,
homeownership is influencing academic achievement when
painting, and other exterior investments increase
the influence is actually household income and wealth.
surrounding properties’ values, it is not clear why
https://crsreports.congress.gov

Why Subsidize Homeownership? A Review of the Rationales
subsidizing homeownership to generate this result is the
with an individual’s other largest asset, his or her human
ideal method. Theories of public finance and externalities
capital, the return to which is labor income.
suggest that a more efficient policy would be to subsidize
the externality-generating activity directly. The government
The Great Recession showed that the return to housing and
could offer a tax credit, deduction, or voucher for painting
the labor income of some workers in certain industries or
or landscaping residential property, for example. Renters
certain age groups may be closely related. Areas with high
and owners alike could then benefit from the incentive
unemployment also suffered high foreclosure rates, which
while producing the desired result—higher property values
had a downward reinforcing effect. Thus, from a portfolio
from more aesthetically pleasing neighborhoods.
perspective, homeownership may not be a financially
prudent decision for all Americans.
Rationale #2: Financial Benefits of
Homeownership
There is also the concern that unlike most other assets in a
Some contend that homeownership promotes economic
typical portfolio, a home purchase is often financed using a
equality. Data reveal that homeowners on average earn
substantial amount of debt. This increases the homeowner’s
higher incomes and have higher savings than renters.
exposure to fluctuations in home prices, since mortgage
Homeowners can also use their home’s equity to finance
debt amplifies changes in an owner’s equity in response to a
discretionary and emergency spending. In addition,
given price change. If prices fall enough, an individual can
homeowners may have greater access to credit to borrow
end up owing more on the house than it is worth—a
for such things as a child’s education, which can increase
scenario referred to as having negative equity, or being
the child’s income, and, in turn, increase his or her ability to
“underwater” on the mortgage. Selling a house also requires
become homeowners. Because of these positive
the owner to incur significant transaction costs, implying
correlations, promoting ownership may be a tool that could
that a house is an “illiquid” asset, which further increases
be used to achieve a more even distribution of income and
risk.
wealth within and across generations.
Rationale #3: Psychological and Physical
Again, economists confront the issue of distinguishing
Health Benefits of Homeownership
causation from correlation. Does homeownership positively
There is an argument that homeownership bestows certain
influence one’s income and wealth, or is the relationship
benefits exclusively to individual homeowners, including
reversed, and higher income and wealthier households are
improved psychological well-being. The pride associated
more inclined to become homeowners? Likewise, there may
with owning and maintaining one’s home could lead to
be some intergenerational wealth transmission mechanism
higher levels of self-esteem and overall life satisfaction.
that homeownership helps facilitate, but it could also be that
Homeownership could also promote a sense of individual
higher-income households are better able to invest in their
security, stability, and control, leading to less stress than
children. If this is the case, education policies, and not
being a renter. As the Great Recession made clear,
housing policy, may be a more economically efficient way
however, homeownership can also produce the opposite
to address income and wealth inequality.
feelings if it becomes a struggle to make mortgage
payments or underwater homeowners feel locked-in to their
Homeownership is also often viewed as a way to promote
property.
the accumulation of an individual nest egg. As long as
home prices are stable or increasing, a homeowner, as
In addition to the psychological benefits, some also point to
opposed to a renter, automatically builds his or her net
the possible physical health benefits associated with
wealth (equity) with each successive mortgage payment.
homeownership. Homeownership may provide higher-
But it is not clear that the financial return to
quality living conditions that lead owners to be, in general,
homeownership is as high or as predictable as some believe
physically healthier than renters. Homeownership may also
once depreciation, maintenance, and forgone investment
allow households to better cope with unforeseen health
opportunities are accounted for. Instead of purchasing a
events by drawing on equity in the home and thus affecting
home, an individual could invest in financial instruments,
the outcome of certain illnesses.
such as stocks and bonds which are generally viewed as
good long-term investments, and which do not require
Researchers studying the psychological and health benefits
upkeep like a house does.
of homeownership have encountered the same problems as
those studying the positive externalities and financial
Policies that promote homeownership may result in
benefits associated with housing—primarily, distinguishing
households holding relatively undiversified portfolios. To
causation from correlation. Some economists have also
minimize risk, say economists, households should hold a
noted that if these benefits of homeownership accrue to the
diverse portfolio of assets. Returns should not be too
individual and not to society, then widespread
closely related, so as some assets in the portfolio are falling,
homeownership subsidy programs may be unwarranted.
others are rising. A home, however, is an inherently large
Economic theory generally predicts that when only private
and practically indivisible asset. For most homeowners,
benefits exist (i.e., there are no externalities), the market
their house is typically the largest asset in their portfolio.
will tend to allocate resources most efficiently. At the same
Committing such a large fraction of one’s portfolio to a
time, one could argue that individual health and well-being
single asset can complicate diversification. Also
are fundamental features of a prosperous society, and if
complicating diversification is the combination of a home
owning a home contributes to one’s health, society should
subsidize homeownership.
https://crsreports.congress.gov

Why Subsidize Homeownership? A Review of the Rationales

IF11305
Mark P. Keightley, Specialist in Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11305 · VERSION 1 · NEW