What does the word “home” mean to you?

Love, family, shelter, or even the familiar scent. In fact, a consistent message from the government since the 1920s is that homeownership is the “American Dream.” This has been the motivation behind many federal policies to promote homeownership.

“In a developed society we believe, as part of the social contract, it is no longer just a matter of protecting people’s rights,” Clayton High School Economic teacher Daniel Glossenger said. “It is important that people have access to quality housing.”

Quality housing might not mean the stereotypical three bedroom house in the suburbs. It may mean not a great quality apartment, but we, the Americans, believe it is important and that is what those rental assistance programs are designed to do.

The sharp rise of the housing industry was contributed to regulators, in both the Clinton and Bush administrations, enforcers of reduced lending standards, that were essential to the growth of homeownership and the housing bubble. Despite the government’s good intentions, economic policies often have secondary effects: the bubble led to the great recession of 2008.

“By the end of 2006, 86 percent of all home mortgage refinancings were cashouts, amounting to $327 billion that year.” Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, wrote in his study, “Unfortunately, this meant that when home prices fell, there was little equity in the home behind the mortgage and frequently little reason to continue making payments on the mortgage.”

Photo Taken By Areeba Khan.

Increased foreclosures led to falling home prices, and the housing bubble burst.  Then Congress overstretched and imposed the Dodd–Frank Wall Street Reform and Consumer Protection Act. “Before this act, the banks had more discretion as to whom they chose to loan money to,” explained Regina Cassady, a professor in the Economics department at Valencia College,  “After this act, there are a list of requirements a person or business needs to satisfy before the banks are allowed to loan the person or corporation money.”

The government used these strict banking regulations to tighten up the market so there would be less risk. The problem then is that the banks can not find “qualified” borrowers to loan the money to.

“Since the economy started to recover, the government finally raised interest rates last year for the first time since 2009,”  Cassady said, “and that sent a signal into the market that the government is anticipating inflation. Housing prices are rising because of people’s expectations; people expect the prices are going to go up.” Thus, individuals or companies jump into the market, compete for houses, and drive the prices even higher.

For the mid-class citizens, the motivation of moving into a house from an apartment has decreased over the years due to rising house prices. To aid the middle class and lower class, the government gave assistance towards both house buying and renting.

“There are three main rental assistance programs around the general St. Louis area,” said Glossenger. The first housing assistance is through section 8 vouchers, or the Housing Choice Voucher Program (HCV). This form of assistance is a rental assistance program funded by the U.S. Department of Housing and Urban Development (HUD). The program allows low-income families, elderly and disabled households to find affordable housing in the private market and receive assistance in paying their monthly rent.

Enacted as part of the Tax Reform Act of 1986, the second program, the Low-Income Housing Tax Credits (LIHTC), which are tax credits for real-estate developers who want to rebuild relevant buildings or construct new housing for low-income housing. It now gives states the equivalent of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. According to the U.S. Department of Housing and Urban Development (HUD), as of 2007, this program has placed in service over 31,000 projects comprising 1.8 million housing units.

The third program is Public Housing. These are buildings owned and operated by the federal government or they are usually the money paid to local housing authorities where they are government owned housing.”

“Those three programs in total run about $40 billion dollars.” Glossenger said, “However, that is small compared to the housing assistance that goes to homeowners, which generally goes to more wealthy Americans who do not realize they are benefiting from it.”

Mortgage housing tax deduction is one of the homeowner assistance programs. This is when a taxpayer buys a house, and that taxpayer is paying money on the mortgage, he or she can deduct the interest paid on the mortgage from their tax liability.

“The only people who usually take that deduction are people who have a large enough income that they are itemizing their taxes,” Glossenger said. “Those people usually have income more than $120 thousand a year, have a mortgage, and they can deduct the interest that they are paying the bank off of their taxes.” In total, this is a fairly large tax deduction in terms of reducing tax liability.

“When I said there is $40 billion that goes to the renters with all three methods of the housing assistance, the mortgage housing tax deduction alone in a year costs the US government about 60 to 70 billion dollars,” Glossenger said.

There is a second housing assistance for homeowners as well, the real-estate tax deduction. However, though not intended, it benefits people who have higher tax properties and tax bills.

“People in Clayton, for example, take advantage of this. The idea is that you pay property taxes on your home, and you can deduct that from your federal income taxes,” Glossenger said.
Those two deductions are to aid citizens who own homes and generally the wealthier. “You do not own a home unless you are wealthy,” said Glossenger.

The housing tax deductions are designed to encourage people to buy houses. However, they benefit people who are usually in the top half of the population.

“The real-estate tax deduction costs 30 billion dollars per year,” according to Glossenger, “When you add up the two tax deductions, we are talking about 90 to 100 billion dollars a year more than twice as much as the [government] gives to the rental assistance program.”

The mortgage housing tax deduction and real-estate tax deduction are designed to encourage people to buy homes and to buy larger homes. Glossenger said, “Without them, you might to able to buy a home about 200,000 dollars. With the tax credit, you might be able to buy a home valued at about 250,000.”

In fact, one thing the economists have learned from the recent financial crisis is that pushing into homeownership households who should not be homeowners can lead to disastrous results; the American Dream can end up being the American Nightmare.

The rental assistance like Section 8 Vouchers often times concentrate poverty. The programs concentrate poverty by saying people who want housing assistance need to live in this area, according to Glossenger.

Scott Susin of U.S. Department of Housing and Urban Development also concludes in his research that public housing tenants live in census tracts with poverty rates 8.8 percentage points higher than in the absence of assistance, tenants in HUD-subsidized privately-owned projects live in tracts with poverty rates 2.6 percentage points higher and voucher recipients live in tracts with poverty rates 2.3 percentage points lower.

“Due to neighborhood opposition, projects are rarely built in the best neighborhoods or indeed in any neighborhood with more attractive housing.” Stated in a research of Edgar O. Olsen from University of Virginia and Jeffrey E. Zabel from Tufts University. The property values of these housing projects are lower because of people’s biases. The people living around the area see the residents supported by the programs as poor and illiterate, and move out of the area, leaving only the similar people in the area.

The residents within the rental assistance program also can face hardship because of the assistance. “Low-income households spend excessive fractions of their incomes on housing rather than those they live inadequate housing,” Olsen stated. Because the assistance program pushed the low-income family into housing that is higher than their spending level, although there is support for the programs, their spending would be largely depended on the housing.

“Consider the possibility that these people would rather spend less on other goods than to live in worse housing or neighborhoods or at less convenient locations.” Olsen stated in his research, “Since the only negative consequence of spending a high fraction of income on housing is low consumption of other goods, some people who make this argument might be saying that these low-income households undervalue other goods relative to housing.” Although the housing of the low-income families is in a better status, the standard of living, including housing, education, quality of life, would decrease because of the overspending on housing.

These rental assistance programs do only simply just influence the communities but also impact government spending and the whole economy in a negative way. Although the $40 billion spent on public housing and section 8 represents a fairly small amount of the US government budget of $3.8 trillion, the $40 billion has a greater impact on the economy than $40 billion because of the multiplier effect. “When money injected into the economy like loans from the bank and government funded projects,” Cassady explained, “the money does not just circulate through the system once, but over and over again until the income is all leaked out of the system via savings with each additional new round of spending.” Depending on the size of the multiplier, the amount of money injected can have a greater impact on the economy than its initial value.

Olsen also stated in his research that “[f]or vouchers, the cost to taxpayers has exceeded the subsidy by the modest administrative cost. For housing projects, the cost to taxpayers has been much larger than the sum of the subsidy and administrative cost.”

This can be shown from a more recent study by Scott Susin of U.S. Department of Housing and Urban Development that concludes the housing voucher program has increased rents of low-quality housing by an average of 16 percent. This does not only affect only affect the people supported by the low housing programs, but the increment also impacted the whole housing market from bottom to top and raised housing prices.

Although both the rental and homeowner assistance programs have been proven that they sometimes steer results in the wrong direction, the programs still help numerous low-income and middle-class citizens to find better housing. However, the costs to taxpayers and the economy as a whole need to be considered. Glossenger concluded that “we should always be asking ‘at what cost is it really worth it to our society?’”