Homeownership has been a milestone for households, a symbol for economic prosperity. Historically, funding to promote homeownership has been a priority to the federal government via the IRS, FHA and other agencies. The primary logic and motivation behind this approach is to enable households accrue and grow wealth through real assets (homes). As more households pursue ownership, household wealth grows, and a wealth effect manifests through the broader economy, increasing household spending – a key driver to economic growth.
However, confidence in this theory was shaken in the wake of the Great Recession as asset values declined due to financial innovation designed for households seeking homeownership at prices beyond affordability, in conjunction with inflated appraisal values for homes in many markets in the U.S. In the wake of the recession, the U.S. homeownership rate has fallen to levels not recorded since the Census Bureau began recording this metric. As of 2nd quarter 2016, the U.S. homeownership rate had fallen to 62.5%, down 0.9 points year-over-year and 6.7 points from the peak of 69.2% set in 4th quarter 2004. Within the rental housing market, the population of renters has increased since the early 2000s across most age segments. Within the affordable rental market, there is a desperate need for additional supply, but development is expensive and resources are limited.
With these trends in mind, the federal government continues to incentivize homeownership through multiple channels. These include tax benefits from interest expense, shelter from capital gains from sales and deduction in property taxes. Based on recent events and changing household financial priorities, the federal government should revisit and recalibrate housing priorities, primarily through reforming the housing finance system as well as the U.S. tax code.
All told, the dollar volume associated in serving homeownership easily overshadows the dollar volume allocated towards the renter market, roughly $142.7 billion to $ 55.6 billion, as outlined by the federal budget in the 2015 fiscal year. It’s important to note many of these programs, especially related to homeownership, are quantified are in the form of tax incentives. By program, the deduction for mortgage interest is by far the largest benefit to homeowners, amounting to roughly $70 billion in 2015 – greater than all rental assistance programs combined. Other major tax breaks include the exclusion of capital gains (valued at roughly $37 billion) and tax deduction associated with property taxes (valued at roughly $33 billion). Already, the costs associated with transitioning from renting to homeownership can be a barrier to many households due to tight lending standards and required down payments.
In the designated affordable market, where demand far exceeds supply, federally sponsored programs are generally more segmented. The greatest dollar volume dedicated to the rental market falls under tenant-based rental assistance (valued at roughly $19 billion) such as Section 8 housing. This is followed by categories focused on construction and development for affordable rental units – project-based rental assistance and the Low Income Housing Tax Credit. In terms of how rental funding is allocated, it is intently focused on the affordable market and households defined as “extremely low-income” or “very low-income” are key beneficiaries of these programs. There are also components within these programs that are focused on neighborhood redevelopment and economic development. Generally, HUD partners with local housing development authorities to identify and deploy funding towards these affordable development projects.
Nevertheless, with such a large disparity in incentives, policy experts have called for housing and development leaders as well as lawmakers to re-think incentives to favor renting, especially in an environment where homeownership remains low and may continue to shrink. In a report by the Center on Budget and Policy Priorities, researchers recommend lawmakers develop a tax credit designed to support renting households that require the greatest assistance as seeking homeownership remains out of reach. Instead of a voucher or some other direct payment, a tax benefit aimed directly at low-income renters is another policy option as demand for designated affordable housing continues to grow.
Based on shifting household preferences and inherent barriers to achieve homeownership, lawmakers, policymakers and leadership in housing and planning agencies should collectively approach the disparity between funding for homeownership and renting to achieve a more balanced approach that promotes opportunity for both owning and renting.