Too Much Housing

The U.S. obsession with homeownership makes for terrible policy. All the subsidies, credits, loan guarantees, interest deductions and the like mean that too much of our capital stock is invested in residential housing and too little in factories and equipment. The attempt to increase homeownership also led to the extension of mortgage credit to borrowers who could not afford homes, thereby promoting the housing bubble and financial panic.

The most maddening aspect of all this is that we have done nothing to moderate or correct these policies; instead, the U.S. has initiated new policies that aim to prevent foreclosures, "stabilize" the housing market, and further expand homeownership. These measures were sold as temporary stopgaps designed to end the recession, but they will be end up being permanent:

When Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it.

As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

This program made no sense even in the short run; housing prices were excessive and homeownerhip was too high before the crisis. Policies designed to promote housing thus prevent a necessary adjustment, and they will cause over-investment in housing going forward.