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.

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

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