Published on Oct 31, 2016
review.chicagobooth.edu | From Fannie Mae and Freddie Mac to the mortgage-interest tax deduction, the US federal government plays an enormous role in the country’s housing market. But what effect is it having—and is there cause for it to be involved at all? Chicago Booth’s Robert H. Topel and Eric Zwick discuss how government intervention affects prices, homeownership, home size, and more.
– Should the government support the housing market?
US government agencies play a huge role
in housing compared to other countries.
Fannie Mae and Freddie Mac, the government-controlled
mortgage companies, turn trillions of dollars
of risky mortgages into risk-free bonds,
while America’s annual mortgage subsidy
is estimated to be worth somewhere
between $70 billion and $150 billion.
Part of the stimulus package introduced by the US government
during the financial crisis was a series of
first-time home buyer credits
providing interest-free loans and tax credits
for home purchases.
But homeownership rates have dropped
from 69% before the crisis to about 64% now.
So who did these policies help?
Welcome to The Big Question,
the monthly video series from Chicago Booth Review.
I’m Hal Weitzman, and with me to discuss the issue
is an expert panel.
Robert Topel is the Isidore and Gladys Brown
Distinguished Service Professor of Economics
at Chicago Booth.
He’s an expert in labor economics,
industrial organization and antitrust,
business strategy, economic growth, public policy,
and the economics of health, energy, and national security.
And Eric Zwick is an assistant professor of finance
at Chicago Booth.
He studies the interaction between public policy
and corporate behavior with a focus
on fiscal stimulus, taxation, and housing policy.
Panel, welcome to The Big Question.
Eric Zwick, let me start with you
because you actually did some research
on this housing stimulus.
Tell us how it worked and whether it worked.
– So joint with David Berger at Northwestern
and Nick Turner at the US Treasury,
we looked into a temporary fiscal program
called The First-Time Home Buyer Tax Credit,
which was specifically a temporary program
designed to address distress during the housing market
in the wake of the Great Recession.
So in 2009, 2010, inventories in the housing market
were at all-time highs, a number of sales were distressed
coming out of either foreclosure
or off of bank balance sheets,
and the design was a temporary tax credit,
$8,000 for first-time home buyers,
so people who had not bought before,
to try and induce them to buy during this window
and sort of shore up the housing market temporarily.
So we set up a research design
to try and study this question,
and I refer viewers to the paper to check that out.
The findings were that the program was quite effective
in inducing a large amount of demand into the program.
We estimate the effect of the program
was to increase aggregate home sales by somewhere between
7% and 14% during the policy period,
so about during 17 months in the throes
of the crisis really.
This demand didn’t immediately reverse.
It was concentrated in the existing-home sales market,
which implies that the direct GDP effects
were quite modest and limited actually
to realtor and origination fees
and perhaps complementary furniture purchases.
But when thinking about the distress in the market,
we see a lot of evidence that the program
facilitated beneficial reallocation
of underutilized assets from sort of
low-value owners of them, such as banks or builders
who had already built the homes,
to constrained higher-value buyers,
people who were induced to buy because of the credit,
who were unable to buy because of disruptions
in the credit market or because of down payment constraints,
but because of the $8,000 were able to buy.
And we saw that the market stabilized,
house price growth stopped falling as rapidly,
at least temporarily, and so when evaluated
as a stabilizer, the program seems to have been
more effective than when thought of
through the traditional demand-management
fiscal policy view.
– So does that mean it succeeded on its own terms
in what it was trying to achieve?
– I think it means there’s a case for fiscal policy
and for this kind of program to be used
during these kinds of periods of extraordinary distress
when market failures such as these credit market disruptions
or foreclosure externalities are first-order concerns.
During normal times, I wouldn’t say, recommend
this kind of a program necessarily,
but I think when evaluated as a reallocation device,
we could say it was successful.
– Okay but in your mind,
this was a successful policy, right?
– Okay, I mean it would be more successful
than letting the housing market take whatever turn
it may have taken.
– Yeah, I think there’s a lot of evidence
to suggest that the kinds of problems
that the housing market was suffering
would’ve been more severe in the absence of the program.
– Okay, excellent.
Bob Topel, you’ve obviously read the paper.
– I agree with everything in it
except perhaps the conclusion.
I thought all of the empirical experiments
that Eric did were excellent,
but the question I asked myself at the end was,
well, if the capital market, here the housing market,
had been operating efficiently,
what would I have expected from a program
that provided $7,500 to $8,000 in subsidy
to first-time buyers?
And that had, as they point out, different impacts
in different markets because there’s more
potential first-time buyers in different markets,
and most of the empirical, perhaps even all
of the empirical findings, I would’ve said,
yeah that’s sort of what I would’ve expected to happen.
I was impressed by the fact that
so much of it was not at the margin of the housing market.
What I mean is in terms of pure stimulus,
the effects were to, as Eric points out,
reallocate the ownership of existing housing
from one group to another. But whether that’s
an efficient—whether the failure of that to happen
in the absence of such a program
is a market failure or not is another question.
– Okay, and what about the bigger question
you referred to earlier, Eric, of whether the government
should be involved.
Now you said, you sort of advertised the idea
that there’s all sorts of distortions, which we talked about
in the introduction in the housing market.
If those distortions weren’t there,
would such a program be more appropriate in your mind?
– You mean something like the mortgage subsidy,
or that sort of thing?
– Yes, those kinds of distortion, government subsidies
towards the mortgage market, the housing market.
– I think my answer would probably be the same
if I was in Canada where there is no mortgage subsidy.
And the evidence that the housing, the mortgage subsidy,
improves the operation of the housing market
would, I think, certainly be judged meager.
Would they need such a stimulus in Canada
in the same situation?
I’m not convinced we needed it here.
– Okay, Eric Zwick you thought the stimulus
was a good idea, and it did work to a certain extent.
Does that mean had we had more of a stimulus
at that point, we would’ve had more of a beneficial effect?
– I think it’s hard to know the answer
to that question actually.
A lot of the effects we see come through
is sort of the value of the $8,000 specifically
in alleviating down payment constraints.
As it so happens, at the median price
during the policy period, the down payment
for people who chose FHA loans was $7,000,
a 3.5% down payment.
So an additional $1,000, $2,000, $3,000 extending the window,
it’s not clear that.
– That extending it to different kinds of buyers perhaps?
– Yeah, so we open it up to first-time buyers.
When you open it up to non-first-time buyers,
you’re introducing the possibility
you’re just inducing people to switch
from their previous home to the other home,
and I think the case for that is even weaker
than the case of moving someone
who is going to buy in two, three, four years
to buy now.
I think Bob’s exactly right to ask
what is the market failure that this program is inducing?
I’m trained as a