New Deal housing finance institutions were created in the 1930s,<sup>10</sup> much of the housing stock was substandard, with one-third of housing units lacking sewage attachments, and 20 percent overcrowded. By 2000, only 1.1 percent of the U.S. housing stock lacked sewage hookups, even though 9.8 percent of households lived in poverty (Census, 2006). Access to financial services is widespread; between 85 and 90 percent of households have bank accounts; the majority of unbanked households are recent immigrants (Barr 2001, Caskey, et al 2006). In recent years, about 40 percent of conventional<sup>11</sup> mortgages were made to households earning less than the median household income, 64 percent of FHA or VA-insured loans were made to households earning less than the median, and overall, half of homeowners earn less than the median.<sup>12</sup>

# **U.S. housing policy has prioritized access to owner-occupied housing by increasing**

**the supply of finance and by providing tax subsidies.**<sup>13</sup> New Deal housing finance institutions such as FHA and Fannie Mae are predominately oriented to increasing and stabilizing financing for owner-occupied single-family homes, originally by providing long term mortgages. Home ownership is further subsidized by tax benefits. These policies, along with the post-World War II economic boom, succeeded in spurring homeownership and housing quality. Garriga, et al., (2007) estimate that about half of the increase in home ownership during the 1950s and 1960s can be explained by the introduction of the 30 year fixed rate mortgage and that the more recent increase can be attributed to the acceptance of smaller down payments. The home ownership rate rose from 43.6 percent in 1940 to 61.9 percent in 1960, and peaked at 69.1 percent in the first quarter of 2005.

# **U.S. tax subsidies for home ownership distort investment, but are strongly**

**supported by the building and finance industries.** Fiscal benefits for ownership include: the tax deductibility of mortgage interest paid on first and second lien loans on primary and secondary homes (maximum total indebtedness of US$1 million); deduction from Federal income taxes of local real estate taxes paid; and since 2006, deduction of mortgage default insurance premiums (GAO, 2005, Garriga, et al., 2007). Economists widely agree that the fiscal benefits of homeownership have steered investment away from more productive uses (GAO, 2005). Glaeser and Shapiro (2003) argue that the mortgage interest tax deduction does not increase home ownership, rather it encourages existing owners to invest in larger and more expensive homes. Housing industry

participants have strongly supported the continuation of tax policies that favor ownership, including the National Association of Realtors, the National Association of Home Builders, and Fannie Mae.<sup>14</sup>

> 10 These institutions included the Federal Housing Administration (FHA), Fannie Mae, the Federal Home Loan Banks, and the Federal Savings and Loan Insurance Corporation. In the 1930s and 1940s, the FHA played a central role in improving quality by setting minimum construction standards for the houses that collateralized mortgages that it insured.

> 11 Conventional signifies loans that carry neither FHA credit insurance nor a VA guarantee. 12 Sources: HMDA data, author calculation, and Census  (2008).

> 13 Access to ownership of a high quality, single family stand-alone house is a central focus of the U.S. housing policy dialogue. Since almost the entire housing stock meets construction standards, the driving determinants of ownership are the cost of urban land, required down payment, and the cost of financing.

> 14 See their web sites for policy statements and executive’s speeches: <u>www.fanniemae.com, www.nar.org, www.nahb.org</u>

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