Recent headlines have been blaring about July’s huge drop in home sales across the country. Along with a drop in the stock market, the plunge in sales has also lead to a spate of discussion about how the housing market got to this place, and its role in the overall economic downturn the country is experiencing. While the news is bleak, there is a silver lining, I think, for sustainability. There could be a serious shift in attitudes about what housing means. Does the American Dream look like a single family house with a car parked out front? Or is it possible that we might revise that vision to include living in the city and relying on transit? We may be closer than you think.
In July the South had the smallest decline in home sales since June in the country with a 23 percent decrease, followed by the West with 25 percent, and sales dropping 30 percent in the Northeast. The Midwest was hardest hit with a 35 percent decline. Nationally, the fall-off in sales of previously occupied homes was 27 percent, reaching the lowest level in 15 years. Even though prices have fallen, people are holding off on buying, believing that the market hasn’t yet reached bottom.
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The fall of the housing market is important because it is an indicator of the health of the larger economy. It’s an indicator because for the better part of the last 60 years home ownership was the driver in many aspects of economic growth. Buying a house was a way of building wealth. Take a loan, buy a house now, and by the time it comes to sell that house you’ll make a tidy profit—which you can use to buy a bigger house. That’s how the pitch went anyway.
The theory goes that this process of people borrowing more and more for more and more house went on, like a balloon filling with air, until it ruptured at the end of 2008. There seems to be some consensus emerging though about the larger reasons the bubble burst. Part of it was banks reselling mortgages in complex securities. But the other aspect of the problem was government policy that backed the loans for mortgages and gave big tax breaks to people buying homes. Here is Robert Samuelson—an economist who has written extensively about the impact of entitlements—in an article entitled “The U.S. Housing Fetish Hurts the American Dream:”
Government subsidizes homeownership in two ways: through tax and spending policies and through credit markets. Tax breaks for homeowners (mainly the deductions for mortgage interest and property taxes, plus preferential treatment of capital gains on homes) exceeded $120 billion in 2009, reports the Congressional Budget Office. These benefits go heavily to higher-income borrowers, who are encouraged to buy bigger and more expensive homes that generate larger tax savings. This is both unfair and unnecessary. By contrast, government subsidies for lower-income renters are skimpier, totaling about 25 percent of the support for homeowners.
True, runaway speculation through the repackaging and reselling of mortgages was what lit the fuse. But Samuelson, who is considered conservative, points out the most critical thing that caused the bubble in the first place: tax policy.
Tax policy (not to mention lots of free, publicly subsidized highways) helped shift the polarity of housing toward land use favoring big lots and big houses. Where is the best place to build the “bigger and more expensive homes that generate larger tax savings” that Samuelson talks about? Certainly not in dense, compact neighborhoods. The current tax code incentivizes unsustainable behavior while penalizing “lower-income renters,” for example, who most often bear higher proportional housing, transportation and health care costs.
And we know that density is better for a lot of reasons (energy, CO2, water quality, and tax revenue) I’ve already talked about in other posts. But that kind of development wasn’t what ended up getting subsidized according to Samuelson. Bigger houses meant bigger tax savings. Well those days are over; as we’ve pointed out, lots are getting smaller and so is the size of houses. This is due largely to the fact that people just don’t have a lot of money and that the market is getting pushed further down by reluctant buyers waiting for the bottom.
As I suggested last week, maybe the best land use strategy is not about revising local land use codes, or promoting more sustainable design, or even transit-oriented development. Perhaps the best way to achieve the dense, compact communities is to reverse the polarity of the tax code, creating a code that subsidizes living in those communities. Consider this tax break essentially a payment for doing what is most beneficial for the broader community and planet—an “urban homesteader tax credit.”
A local example helps make the point. A neighbor of mine moved out of our building and into a 182 square foot condo in a different neighborhood. (And I thought my place was small!) Here’s what he said about it when he was featured in an article in the Sunday Seattle Times:
‘I wanted to compress my home to squirt me back out to the community,’ he says, taking inspiration from dwellings in Scandinavia and Japan, places where space is dear. ‘That was one of the philosophical reasons. I want to be able to shop daily, not store a lot and eat really well.’
Now imagine if along with the benefits he describes he also got to pay less of his money in taxes next year. That kind of tax break—typically reserved for home buyers spending more money on housing—could incentivize living in multifamily rather than single family for instance. Since the earliest days of our history the federal government has promoted behavior with subsidies. In the 19th century for example it gave away free land to people who were willing to move west through the Homestead Act.
The idea of an urban homesteader tax credit—providing big tax benefits to people who buy compact homes in compact communities—could help reinvigorate the housing market and make small not only beautiful but affordable as well. It might also lead to a different, more sustainable American Dream.