Turn off the spigots
The U.S. housing recovery shows it’s time to trim subsidies. The market finally looks close to bottoming out. Prices are reasonable and rates for borrowing mortgages are ultra-low. Mortgage interest tax deductions, loan guarantees and even some foreclosure assistance are looking increasingly unnecessary.
Take, for example, the delinquency rate. It dropped to 7.4 percent in the first quarter, according to the Mortgage Bankers’ Association. That’s almost a full percentage point below last year. The number of new homes being built is a third higher than this time last year, while sales of both new and existing homes are also on the up. And the National Association of Homebuilders index is 20 points above its nadir and now at its highest level since the end of 2007.
All this suggests that much of the assistance the state gives to the housing market is no longer needed. The home mortgage tax break, for example, is a pre-crisis crutch that primarily benefits those who don’t need the help – wealthier borrowers, who get more back simply because they pay more tax. Scrapping the deduction completely risks causing hardship to those borrowing more modest amounts, but capping it at $10,000 would limit its market distortion without removing a prop from middle-market housing.
The most obvious distortions to eliminate are the outsize guarantees on home loans provided by government-backed mortgage agencies. Fannie Mae and Freddie Mac backstop qualifying loans up to $625,500, while the Federal Housing Authority’s limit of $729,750 is even more excessive. These are both hangovers from the crisis. Capping guarantees at the old rate of $420,000, or even lower, would limit the subsidy to middle-class borrowers. That could then mark the first step in reducing the overall influence of the agencies on the market.
There’s no quick and easy fix for the housing market. But it’s looking healthier each month. That makes keeping some of these more egregious distortions in place harder to justify. Cutting them would restore some balance to the market and allow the cash to be put to more productive uses.