Last time, I laid out how the US government turbocharges home-value speculation in the guise of promoting homeownership. This time, I explore whether an unusual left-right political coalition might assemble to redirect policy toward affordable and abundant housing.
US housing policy, in its principal elements, is not about housing, I recently argued. It’s a system for raising real-estate prices, a way to build additional wealth for those who can afford to buy into its Ponzi scheme of escalating home values.
The United States subsidizes mortgage borrowing. It subsidizes property taxes. It subsidizes capital gains on your home. It subsidizes ownership over renting by taxing the income with which people pay rent but not the in-kind or “imputed” rent that homeowners get for free. It subsidizes the entire mortgage-lending enterprise with light regulation of systemic risk, periodic federal bailouts, and an implicit promise to keep providing them.
Every one of these policies encourages people to treat their housing as an investment and to sink as much money into it as they can, rather than investing their savings in their own education or businesses or in financial instruments like bank deposits, stocks, and bonds—things that make the economy more prosperous overall.
In this article, I describe what a housing policy that’s about housing rather than real estate would look like. I then sketch a plausible, though perhaps not likely, scenario for how such a housing policy might come to be. But first, I need to underline a key point.
An essential contradiction
US housing policy contradicts the rhetoric used to justify it. It claims to seek both affordable homes for all and also widespread wealth-building through homeownership. But these goals are fundamentally at odds.
You cannot have an economy with both abundant affordable housing and appreciating home values.
You cannot have affordable stable homes for all and also a universal wealth-building opportunity through homeownership—a “pathway to the middle class.”
You just can’t.
Homeownership only grows your wealth if home prices rise, and rising home prices make housing less affordable. Affordability or wealth building? You have to pick.
Chicago-based urbanist Daniel Kay Hertz had it right when he wrote, “Mostly, American housing policy resolves this contradiction by quietly deciding that it really doesn’t care that much about affordability after all.”
Last time, I pointed out that a home-equity-focused housing policy is a bad way to run an economy, because it diverts investment capital from productive to unproductive uses, boosts inequality, dampens job creation, widens economic and racial disparities, increases climate-damaging emissions, makes housing less affordable, and can generate financial bubbles and the recessions that follow their bursting. I also noted that the US Department of Housing and Urban Development is a bit player in housing policy, because these home-equity-focused policies are administered primarily through the tax code and the regulation of mortgage securitization.
What would housing—rather than real estate—policy look like?
What would the alternative look like? Well, alternatives—plural—abound, and you can see them all over the world. Every country has its own political economy of housing. Some are similar but not identical to that of the United States. Some are dramatically different. I’ll describe some of them in my next article, but a primary takeaway is that each country’s housing situation is hard to disentangle from its political economy of housing—the cluster of interacting forces that have shaped the evolution of its institutions, demography, politics, culture, and buildings. Housing policy, in short, is idiosyncratic. You don’t change a political economy overnight. You change it in steps. Policy changes are the proximate causes of these changes, and they stem from the emergence of new political alignments.
Detailing an alternative US political economy of housing, therefore, is hard to do. Much is unknowable in advance. Still, in the United States, in an affordability-first housing economy, it’s a good bet that housing policy would stop subsidizing mortgage borrowing, property taxes, capital gains, ownership over renting, and the financialized mortgage industry.
National policy might instead support ownership with direct grants of fixed amounts rather than tax breaks that grow with the amount of debt. Or it might remain entirely neutral between buying and renting housing, as is Swiss tax policy. It might emphasize stability, whether through ownership or long leases, both of which provide residents with secure tenure. Indeed, an anti-speculation housing policy might aim to promptly deflate real-estate bubbles, keep investment capital from pooling in housing, and instead keep it flowing toward productive pursuits—innovation, better products and services, new technology, greener systems, and greater opportunity.
Another aim of national housing policy might be to stabilize housing prices, to deflate them in expensive cities and leave them unchanged, pretty much forever, elsewhere. Indeed, in a political economy of abundant housing, rising prices would be a sign of policy failure, an indication of the need for Washington, DC, to lean on state and local governments to allow construction of much more housing. (Perhaps as outlined here.)
At the level of the individual, in an affordability-first housing economy, your dwelling would be a long-lived, utilitarian durable good; it would be like furniture, not like a stock portfolio. There would be no point in checking Zillow monthly to see how much your house value has gone up or down. You’d no more invest in a house for financial gain than you’d invest in a refrigerator or a box spring. You’d buy a home for nonfinancial reasons, maybe because you like doing home repairs and improvements or because you value the sense of independence it gives you.
You might rent your living space if you’d rather spend your time on other pursuits, leaving building management to professionals. Or you might rent because your housing needs are changeable: marriage, divorce, a baby, another baby, a departure to college or the military, a parent moving in, a new job. One of the little-noted downsides of the US housing system is that owners get locked into ill-fitting homes because they are investments, not just residences. Millions of baby boomer empty nesters are currently clogging up the family-sized housing supply, watching their home equity increase and preventing their children’s generation from taking their turn in three- and four-bedroom homes. A housing economy of abundant, affordable housing would allow people to match their needs with their homes, year by year.
Change has already begun
Few in government, whether in Cascadia or in Washington, DC, are likely to embrace this full list of changes soon. Homeownership is too deeply enmeshed in North America’s culture and mythology. The very term American Dream often seems to have evolved from its original meaning of personal freedom and economic opportunity to simply mean homeownership. The shift to a new political economy of housing will take many steps.
Already, though, US politics has taken initial strides. The peak of the housing-as-real-estate political economy was more than a decade ago; in fact, in the run-up to the financial crisis of 2008. Afterward, after the bailout of mortgage lenders and their affiliated financial partners, regulators somewhat tamed the excesses of the financialized mortgage industry. Mortgage lenders began scrutinizing borrowers more cautiously again, although at an immense cost to the low-income households who lost everything to foreclosure, plus the worldwide job losses and income stagnation the crisis triggered.
In 2017, unexpectedly, the United States took a bold step away from real-estate-focused housing policy. In the giant Trump tax cut of that year, the Republican Congress clotheslined two of the main tax subsidies for home-value speculation—a change that many housing reformers despaired of ever seeing arrive and never expected to see from a conservative party. Hidden in the fine print of the Tax Cut and Jobs Act, and getting little attention at the time given the bigger news that tax rates on corporations and rich families were dropping markedly, were reforms that diminished the flow of federal largesse to home buyers.
These reforms trimmed down from the top and then shadowed up from the bottom two of the main tax breaks for home buyers: the mortgage interest deduction and the state and local tax deduction. (If you want to understand what that means, click below to read the details of the reforms. Or take my word for it and skip ahead.)
First, the 2017 reform lowered the mortgage interest deduction limit on how big a loan you can deduct interest from when you calculate your US personal income taxes. Before the reform, you could deduct from your income the interest you paid on a loan of up to $1 million—a tax savings worth tens of thousands of dollars for many households. Congress lowered the limit to $750,000 of loan principal, making the policy less favorable for high-income families in expensive housing markets. It’s a step toward a more-equitable tax system, but only a small share of mortgages are for loans of more than $750,000.
Second, Congress capped at $10,000 how much state and local tax you can deduct from your income before calculating your federal tax. In expensive markets, property taxes make up a large share of homeowners’ taxes, so capping the state and local tax deduction has the effect of making it more expensive to own high-priced real estate: you get less of a break on your income taxes for paying lots of property taxes. This change too affects only a modest share of the population, though, because few people pay more than $10,000 a year in state and local taxes. Some 60 percent of the households whose state and local taxes exceed $10,000 a year are among the richest 1 percent of households.
Third—and more impactful than the first two—Congress nearly doubled the standard deduction, from $6,500 to $12,000 for individuals. This increase caused the share of taxpayers who listed and summed their specific deductions, or “itemized,” to drop from 20 percent to 8 percent. You only benefit from the mortgage interest or the state and local tax deduction if you make enough money and have enough deductions that itemizing saves you money. Otherwise, you might as well claim the standard deduction. Congress increased the standard deduction so much that most middle-class households, even homeowners, no longer save money by itemizing. This change makes all deductions, including those for mortgage interest and state and local taxes, worthless for most taxpayers. Renters, meanwhile, got a better-balanced scale, so that they were no longer as harshly disadvantaged by the special favors for owners.
The combined tax subsidy to home equity from the mortgage interest deduction and the state and local tax deduction’s property tax portion fell from nearly $70 billion in the 2017 tax year to about $32 billion in 2020, a decrease of more than half. The number of households taking advantage fell by a similar margin, and it fell even more precipitously among middle-class households.
These reforms stand in the smoking ruins of the Trump years as a legislative marvel: progressive rules enacted by conservatives. Democrats in both the House and the Senate take issue with the state-and-local tax deduction. In July, Senate Democratic Leader Chuck Schumer said, “If I become majority leader, one of the first things I will do is we will eliminate [the state and local tax reform] forever.”
The politics of housing do not line up neatly with typical party ideology. They sometimes invert. Democrats do not consistently take the progressive, pro-fairness position (of eliminating tax subsidies that mostly promote speculation and help wealthy people); Republicans do not consistently take the conservative, anti-tax position (of expanding tax breaks that mostly help wealthy people).
This inversion likely stems from geography. Republicans increasingly represent low home-equity districts and states, while Democrats increasingly represent high home-equity ones. So Democratic elected officials are torn between their ideological commitments and their constituents’ financial interests. Republicans, meanwhile, can pass reforms that save money for their constituents and raise Democrats’ taxes.
This inversion may well grow in the years ahead: It could be that the future of housing politics is a curious coalition of left and right. Much depends on polarization. If Senate Democrats leave the filibuster intact and Senate Republicans blockade the Biden Administration as they did the Obama Administration, few laws will change. Housing policy will remain frozen in place. That’s the most likely scenario, and there’s not much more to say about it.
But if optimists, including President Biden, are right and a modicum of bipartisanship revives in the Biden years, it’s conceivable Congress could build on the 2017 reforms.
Federal steps toward a housing policy
The logical next steps would be to:
- Finish off the mortgage interest deduction and the state and local tax deduction by phasing them out over a decade—or making them moot by further raising the standard deduction.
- End the capital gains exemption on home sales (which I detailed last time) so that profits from your home are taxed the same way as profits from appreciating stocks. (A related reform to Section 1031 of the IRS Code would do the same thing for other real-estate investments, such as apartment buildings, which enjoy a similarly favored tax status that boosts speculative investment in them.)
- Provide a tax credit for renters as a counterweight to the homeowners’ tax exemption for imputed rent (also detailed last time). A truly even-handed tax policy for housing would tax imputed rent outright, as Switzerland does, but an imputed rent tax is bound to be fiendishly unpopular: few would accept paying tax to live in their own homes, which is how most would see it. A less quixotic approach would be to provide renters with a compensating tax benefit. If the typical homeowning family saves $2,500 a year in taxes because of the imputed rent exemption, giving renters a tax credit of the same value would level the scales.
- Regulate mortgage securitization more tightly to reduce the systemic risk it poses to the financial system, and explicitly revoke the implicit guarantee of federal bailouts for the mortgage-lending industry. The chances of financial panics and the resulting recessions will diminish, and the bidding up of home prices will slacken as loan terms tighten.
The strange-bedfellow coalition that might win such policies, if not in the Biden Administration then sometime in the decade ahead, could include, from the left, the young and the urban and, from the right, populists and libertarians. Such a coalition would arise less by a groundswell of public demand than by the realignment of political parties that is well underway.
Realigned housing politics
Consider Democrats’ position on the mortgage interest deduction, for example. Before 2017, because many middle-class families benefited from it, elected Democrats could proudly champion their middle-class constituents’ housing tax breaks and style themselves as tribunes of the people, even though their rich constituents were quietly banking most of the resulting rewards. Since 2017, only the rich benefit, which puts elected Democrats in a bind.
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Democrats’ growing progressive urban wing advocates for renters, young people, and people of color, none of whom have much to gain from the mortgage-interest deduction. The party’s moderate suburban wing represents many homeowners, yet many of them have moved left on racial and economic issues in recent years.
The party’s intellectual and policy leaders are now, thanks to a decade of discourse among activists, think tanks, and policymakers, acutely aware of just how bass-ackwards US housing policy has long been. To the extent that they hold a unified view about housing tax breaks, it is that federal policies ostensibly in support of homeownership have been a tool of segregation by race and class. In short, the once implacable phalanx of Democratic support for policies like the mortgage interest deduction has dramatically weakened.
Among Republicans, meanwhile, the change in alignment is just as marked. Once a party centered among white, educated, upper-middle-class homeowners in suburbs, it has become the party of non-college-educated, working class white people, especially in exurban and rural areas. Its ascendant faction is populist, working-class, anti-elite, anti-establishment, and impatient: it wants big changes fast and it distrusts Wall Street as much as Hollywood and other elite institutions. The party’s intellectual leadership, meanwhile, leans strongly toward libertarianism, and libertarians have long deplored the way US tax policy gives myriad tax breaks for favored behaviors like homeownership. The majority of Republicans in office, meanwhile, have focused on neither populist nor libertarian priorities. They’ve prioritized tax cuts and deregulation for corporations. Yet even this business-advocacy impulse of the party does not align with the home-equity politics of the past.
In sum, none of the Republican Party’s major factions cares as much as it used to about tax breaks for high-end homeowners. High-end homeowners are no longer its base. The party’s increasingly downscale constituents have little to gain from those breaks, and raising federal tax bills for Democrats in expensive cities and states holds an unmistakable political appeal—a way to “own the libs.” For a populist, anti-establishment, libertarian, pro-business party, the doubling of the standard deduction in the 2017 reform was perhaps an example of the Republican politics of the future: bold, simplifying, and even egalitarian.
What’s more, in 2017, Republicans in the US House originally proposed to lower the mortgage interest deduction lid all the way to $500,000, not $750,000, and to eliminate the state and local tax deduction entirely rather than cap it at $10,000—even bolder moves against subsidizing home-value speculation than Congress ultimately passed. These proposals would have been profoundly progressive, pro-housing reforms.
Thus, each party has grown more amenable to housing reforms in recent years, and a bipartisan, pro-housing coalition could assemble the Democrats’ urban, progressive bloc with the Republicans’ populist and libertarian blocs.
As I said above, the most likely future is one in which Congressional Republicans operate as a bloc and oppose everything the Biden administration does. The future I’m writing about is the less-likely scenario, in which the last gasps of the Trump era, and especially the far right’s storming of the Capitol on January 6, 2021, prove to have opened an enduring rift within the right.
Late in 2020, populist arch-conservative Senator Josh Hawley (R-Missouri) joined with populist arch-progressive Senator Bernie Sanders (I-Vermont) to call for $2,000 stimulus checks for all Americans. And this month, Senator Mitt Romney (R-UT) proposed a simple and sweeping form of universal basic income for children—a conservative version of President Biden’s proposed child-tax credit.
Such bipartisan economic populism could catch on. It could expand from showboat policies like stimulus checks to other federal tax and spending policies, especially ones that the filibuster-prone Senate can reform by simple majority through the budget reconciliation process. The remaining tax breaks for high-income homeowners fall in that category. Why should Missouri truck drivers pay tax on all the wages they use to cover their rent while stock traders in New York continue to deduct the interest they pay on their condominiums and skate away with untaxed capital gains when they sell them?
Around housing, the parties have realigned. The question is whether polarization will make that realignment irrelevant by preventing bipartisan action. Or whether individual leaders will step out, forge cross-party agreements, and start crafting reforms that benefit the new bases of their parties.
Predicting the future of partisan behavior is a fool’s errand, no more likely to succeed than predicting who will emerge from the Congress of Cardinals as the next pope. But I can at least say where to look for signs. Here in Cascadia, we might look to the actions of the four regional Senators who sit on the Finance Committee, which controls tax bills: Oregon’s Ron Wyden, an abundant-housing progressive who now chairs the committee, and Senators Maria Cantwell (D-WA), Mike Crapo (R-ID), and Steve Daines (R-MT). Crapo and Daines come from states where housing is less expensive than elsewhere, so they have no geographic reason to oppose further reforms to the mortgage interest deduction or the state and local tax deduction: it will cost their constituents little. Wyden and Cantwell represent blue states with acute housing shortages and strong progressive values.
How will these four respond? Will they stick to their teams or begin finding common cause? Will they erase what’s left of the mortgage-interest deduction, now that it only helps the rich? Will they further trim the deduction for property taxes? Will they close the loophole for capital gains on home sales? Will they support a renter’s tax credit to make policy neutral between buying and renting? Will they let US housing policy continue to be a sham, purportedly about homeownership when it’s really about boosting home equity? Or will they build on the curious legislative boon of the Trump years by making policy that’s pro-housing and anti-speculation?
In an increasingly populist, anti-establishment era, in which the parties have realigned, perhaps housing policy will break with the past and begin to resolve the contradiction at its heart—abundant, affordable dwellings versus home-value appreciation—in favor of housing rather than real estate.
Next time, I turn to the zoning aspects of national housing policy by exploring lessons for Cascadia from around the world.