by James A. Bacon

Between zoning codes, parking regulations, development fees, tax abatements, transportation and infrastructure spending, caps on building permits and other local government intrusions into real estate markets, the surprisingly widespread notion that dysfunctional human settlement patterns can be blamed on unchecked capitalism has always been a ludicrous one. Now Smart Growth America has taken the wrecking ball to what remains of that particularly pernicious piece of nonsense with the publication of “Federal Involvement in Real Estate: A Call for Examination.

Each year federal loan guarantees, tax expenditures and direct spending impact real estate markets to the tune of $450 billion yearly, concludes the report — and that doesn’t even take into account the role of Fannie Mae and Freddie Mac, which shape the sector through their mortgage securitization policies. “Though usually viewed as a ‘free’ market, the U.S. real estate sector is heavily influenced by direct and indirect government intervention,” states the report.

Here’s a breakdown of the federal influence on real estate programs FY 2007 to FY 2011:

Loans and loan guarantees………………….. $1.363 trillion
Tax expenditures………………………………..  $0.680 trillion
Direct grants and credit subsidies………..  $0.197 trillion
Total commitment…………………….   $2.23 trillion

Federal financing is heavily skewed to home ownership — 84% of total federal spending on owner-occupied housing — which means that these programs also are skewed toward the higher-income households. Despite the fact that 35% of American households are renters, multifamily rental opportunities make up only 16% of total housing support.

Particularly egregious is the mortgage interest deduction (MID), which applies to first and second homes alike. In 2011, according to the report, approximately 30% of the households claiming the MID also claimed the deduction on a second home. Here’s a breakdown of the direct and implicit subsidies per household broken down by income group:

Graphic credit: Smart Growth America. (Click for more legible image.)

(I never could understand the Democrats’ obsession with raising tax rates. If the Dems want social justice, how about clawing back subsidies for vacation homes first!)

Federal programs also subsidize development on the outskirts of metropolitan regions that are very costly for communities to serve with utilities, transportation access and other infrastructure, while providing only a pittance for re-developing communities closer to the urban core. States the report: “This has a profound effect on the cost to taxpayers. Building new infrastructure rather than fixing existing infrastructure increases maintenance costs for states, municipalities and the federal government.”

Smart Growth American argues that it’s time to re-evaluate federal priorities and to shift resources to the following:

  • Support balanced housing choices in suburbs, cities and rural towns.
  • Reinvest in America’s existing neighborhoods and communities.
  • Provide a safety net for American families.
  • Help more Americans reach the middle class.

Personally, I believe we ought to scrap the wealth-transferring, market-distorting government programs outright. Let developers, builders and consumers decide what gets built and where, within a modest local regulatory framework to prevent blatantly inconsistent land uses. While Smart Growth America’s priorities make more sense than current priorities at this moment in time, they will just create another set of dependent populations and vested special interests that will work ceaselessly to protect and expand their privileges at the expense of the national good. With national deficits still running at $1 trillion a year, Congress needs to cut something. Every single one of these programs would make a good start. Then we could get the best of both worlds: lower deficits and smarter growth.

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11 responses to “Documenting the Federal Distortion of Real Estate Markets”

  1. DJRippert Avatar

    Gotta love Baconomics.

    “I never could understand the Democrats’ obsession with raising tax rates. If the Dems want social justice, how about clawing back subsidies for vacation homes first!”.

    Well ….

    Let’s look at the prices of vacation homes in some toffy locales …

    I like Kiawha Island. Let’s take that as an example. Average home cost – $1.2M.

    Now, if somebody’s vacation home costs $1.2M how much do you figure their primary residence is worth?

    Let’s say $2M.

    The maximum loan amount that can be deducted is $1.1M. Doesn’t matter how many homes – it’s $1.1M in total.

    If I borrowed to finance $1.1M of my $1.2M vacation home I’d be at the maximum.

    But here comes Jim “Ted Kennedy” Bacon with a plan to end that evil subsidy. No more deduction on the vacation home.


    I pay off the vacation home note and borrow $1.1M against my primary residence.


    1. Fair enough.

      How about clawing back subsidies for rich people’s home… Cap the interest rate deduction at $20,000 a year. Keep it high enough to help people buy their first home, but not so high as to subsidize extravagance?

      1. DJRippert Avatar

        How about eliminating all deductions for personal and corporate income taxes?

        Then, lower the rates even if the “total take” is higher.

        I’d guess that less than 10% of the criminals we call politicians would agree with that.

        After all, if you can’t sell tax breaks to special interest groups what can you sell?

  2. The mortgage interest should be capped so that everyone gets the same subsidy and if you want to buy more house, that’s fine – do it on your dime.

    subsidized flood insurance for 2 mil vacation homes ? nope.

    again – it should be capped and if you want to build a 2 mil vacation home on the beach, we’ll give you the same flood insurance break that others get but no more. The rest is your dime.

    1. DJRippert Avatar

      Now we have Larranomics.

      The mortgage interest deduction is capped – at $1.1M in total loan value per family. So, I’ll assume that LarryG meant to say that he thinks the cap should be lowered.

      OK. To what? The median home cost in the United States. That’s good for people in South Dakota but not so good for people in Chicago. Why should urban taxpayers continue to subsidize the rural lifestyle?

      The government has picked a number ($1.1M) and used that number for teh cap. It makes sense to me. The cap is high enough that it covers all of the mortgage in most place in America but only part of truly high end homes.

      The two better alternatives are 1) you can only deduct the interest on the mortgage on the first house you buy (this has some knock on effects as well) or 2) Nobody deducts anything. If you can’t afford to pay the mortgage on a home without getting a tax break you shouldn’t be buying a home in the first place.

      Meanwhile, the ODumbo Administration is asleep at the wheel while no-money down mortgages reappear.

      This is how rot starts. First, it’s just for people with “other assets”. Then, it will be for people who have demonstrated a long term history of high salary. Then, it will be for anybody with a good credit rating. Then, it will be for pretty much anybody. Then, the banks will falter and someone will ask if they are “too big to fail”. And guess what? Under ODumbo they are bigger than ever!

      Presumably, the next president will be able to “Blame Obama” for the first four to six years of his or her tenure.

  3. reed fawell III Avatar
    reed fawell III

    I am of course pro-smart growth – but one has to be extremely careful here.

    As to settlement patterns and people’s choice as to where to live, the tax code should be revenue neutral between groups, but surely promote good habitation for all, and discriminate against no particular group. This is where I likely part with the single issue, ideologue pro-growth crowd.

    So, in my thinking, Jim’s caveat is well taken and important, as a break against some groups trying to run how “Others” live. Which latter reality is a modern day plague on our society, unfortunately.

  4. the conundrum is when it comes to govt policies – does everyone get the same deal or are some people subsidized?

    for instance on house ownership – is the intent of the policy to encourage home ownership or to give higher and more tax breaks for more expensive and/or multiple homes?

    right now the “cap” is so high that it’s way, way beyond basic home ownership. Perhaps there should be a cap that is tied to income and/or the median price of a home IF the goal of the policy is to encourage home ownership – just owning a home – not a million dollar home.

    second, when you choose to live far from work and commute every day, that takes more road infrastructure – not just a road, but a wide enough road to handle the peak commute hour loads.

    that costs a lot of money and a legitimate question (at least in my mind) is that if we spend big bucks on commuter roads – shouldn’t the user of the road be the one to pay?

    Otherwise are we not just building roads to cater to sprawl?

    1. DJRippert Avatar

      Lots of people under the age of 65 are early retirees or semi retired. In many cases, these people have substantial assets – including home equity. These people could work but have decided not to work. Great Falls is full of people in this situation. So are many other places (like most of Naples, FL for example).

      All of these folks still want the Army, Navy, Air Force and Marines to protect them. If their boat loses power at 2:15 pm on a Thursday afternoon they want the Coast Guard to come get them. The want the local police to patrol and the state prisons to house law breakers.

      But they don’t want to work and they don’t want to pay income taxes.

      There should be a “citizenship charge” to cover the costs of providing services to everyone. It is charged to anybody under 65 without disability and with a net worth of over $250,000. The “Citizenship Charge” is deductible against your federal and state income tax to the extent that you pay them. It is not deductible against your capital gains or dividend taxes.

      I’d suggest a tax “Citizenship Charge” of $15,000 per year. $5,000 to your locality, $5,000 for the state and $5,000 for the federal government.

      After that, we can talk about how the long distance commuters who are going to a job and paying income taxes can be somehow taxed more for the “free stuff” they are getting.

      It’s time to root out the subsidies paid by working people to support those who have simply decided that they don’t want to work anymore.

      1. reed fawell III Avatar
        reed fawell III

        Intriguing idea.

        But where will this Citizenship Charge stop once its nose is under the taxpayers’ tent, given the history of our big government friends?

        At the rate we’re going, air will soon be taxed. All fair, just and rational, of course. A tax imposed according to the citizen’s weight, height, lung capacity as adjusted by daily sleep/ awake / exercise oxygen intake ratio.

        Why should not every Citizen taxed? They consume our planet after all.

  5. I have zero problem paying for real “defense” but I object to turning our young into cannon fodder to feed some neo-con’s wet dream.

    You want the truth? You can’t stand the truth.

    The TRUTH is that we take in about 1.5T in tax revenues and we spend about 1.5T in “defense” which is not only DOD, but DOD, the VA, Homeland Security, anti-terrorism efforts by the CIA/FBI and others, NASA military satellites, Dept of Energy nuclear reactors for ships, etc….

    So I think we should have a NeoCon tax for the idiots who think DOD deficits don’t matter”.

    re: tolls – I am FINE with tolls – bridge tolls, dynamic tolls, even cordon tolls. We should fund our maintenance and OPs with the gas tax (indexed) and build new roads as toll roads and not have any more tax increases for transportation nor developers.

    Build that Outer Beltway with a bridge over the Potomac and charge each person who uses it their rightful share of the costs. And if some schmuck from Farmville wants to take a tour of Md via a western belt, let him pay his rightful share also!

    re: “capped” mortgages, – don’t worry about different regional median prices – just give everyone the same treatment – like we do with those “credits” on page 2 of the 1040. You don’t get More (or less) education or energy credits depending on what school or the regional price of energy efficient materials .. you just get a set credit – no matter where you live or which school you attend.

    The states can get into the act if they want to and that’s the more appropriate place to have subsidies for mortgages anyhow.

  6. Hey DJ – I notice your buddy Chap Peterson has spoken out AGAINST 2 terms for Gov and his argument is that it will change the legislature from a part-time to a full-time – and in his view – having “professional” politicians is a BAD thing.

    What say you?

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