If you are a homeowner filing your income taxes, you’re probably pleased with your home mortgage interest tax deduction. As you may know, the federal government lets homeowners write off interest payments on mortgages of up to $1 million. It also lets them write off interest payments on home equity loans of up to $100,000.
As I argue in my recent book, that’s not the only way the U.S. government leverages public resources to support private home ownership. Through the federal secondary mortgage market, it buys mortgage loans that are originated by private lenders, bundles them together into mortgage-backed securities, and then sells them to investors, along with a guarantee against borrowers’ defaults.
It also insures home mortgages through programs like the Federal Housing Administration and Veterans Affairs Department’s mortgage programs. Of course, because lenders are more willing to lend when the risk of doing so is low, by reducing risk, the federal government channels credit toward private home ownership and away from other possible investments.
Why? What is the rationale for state financial support for private home ownership?
One familiar answer cites the “American Dream.” Work hard, the idea is, and you will succeed, no matter your starting place in American society. An important part of your success will be owning your own home. According to this view, the government serves your good, and it serves the good of all Americans, when it puts home ownership within reach. It encourages and rewards merit, while promoting social mobility.
It might be nice if this were true. But it’s not.
Public subsidies for home ownership disproportionately benefit the wealthy and those who build, finance and sell private homes for profit. They do relatively little to help middle-income and working families, let alone the working poor.
In 2010, for example, about three-quarters of families earning $100,000 or more — that is, families in the top 13 percent of the income distribution — claimed a mortgage interest tax deduction, compared with less than half of families earning between $50,000 and $100,000, and less than a quarter of families earning between $30,000 and $50,000.
Wealthy people tend to borrow more to buy more expensive homes than do middle- or working-class people. That means the biggest interest tax deductions go to the very rich. The average family earning $250,000 or more in 2010 deducted $15,660: almost four times the average deduction for a family earning between $50,000 and $100,000 ($4,140) and more than nine times the average deduction for a family earning between $30,000 and $50,000 ($1,660).
What is more, because of this country’s long history of racial discrimination in housing, public subsidies for home ownership disproportionately benefit whites at the expense of people of color. In 2010, 74.4 percent of non-Hispanic whites were homeowners, compared with just 45.4 percent of blacks and 47.5 percent of Hispanics. Even those people of color who were homeowners owned homes that, on average, were valued at lower rates. The median value of homes owned by people of color was $149,000, less than 80 percent the median value of homes owned by non-Hispanic whites ($187,500).
So where did we get this idea that home ownership serves the good of all Americans? What makes people think the government promotes the public good when it supports private home ownership?
Perhaps unsurprisingly, these ideas originated with the organized business interests whom they benefit the most. In the early decades of the 20th century, the dominant view in the United States was that the government should stay out of the housing market altogether. But in 1917, members of the newly professionalized real estate industry launched what they called the “Own Your Own Home” campaign. This massive public relations and advertising initiative peddled the message that home ownership was a critical part of what it means to be — to quote one “Own Your Own Home” ad — “a real American.”
At the same time, industry elites began to petition the state for financial support for private, profit-driven development.
At first, few were convinced. But the stock market crash of 1929 and the Great Depression that followed persuaded political leaders like Herbert Hoover and Franklin Delano Roosevelt that the state should intervene to help buoy the failing U.S. housing market.
In December 1931, when Hoover convened his White House Conference on Home Building and Home Ownership, he cited approvingly the real estate agents’ narrative of what it means to be an American. “I am confident,” Hoover declared, “that the sentiment for home ownership is so embedded in the American heart that millions of people who dwell in tenements, apartments and rented rows of solid brick have the aspiration for wider opportunity in ownership of their own homes.”
Hoover’s conference yielded a series of recommendations that strongly influenced the New Deal housing legislation of the 1930s. The National Housing Act of 1934, for example, marked a critical turn in the American state’s involvement in the market of privately owned housing. Crucially, it created the FHA, which massively expanded private home ownership for middle-class whites.
But insuring private mortgages wasn’t the only way the government used public funds to house families and create jobs in the early 1930s. In 1933, the National Industrial Recovery Act established the Public Works Administration (PWA), which over the next three years constructed 22,000 units of rental housing that were affordable for working people.
Predictably, the real estate lobby objected. “GOVERNMENT HOUSING IS NOT FREE,” declared a billboard ad it distributed as part of its anti-PWA campaign. “All government revenue comes from you, the tax payer. Can you honestly afford to pay a portion of your neighbor’s rent through increased taxes and still pay for your own housing expenses?”
These questions may seem odd coming from a group agitating for the use of public funds to subsidize profit-oriented housing development. But the real estate lobby was powerful. It helped mold the United States Housing Act of 1937, which ended once and for all the federal government’s role in building subsidized rental housing.
The 1937 act also introduced draconian regulations to govern local housing authorities. Eligible tenants, it declared, had to be poor: at least 20 percent below the income bracket that could afford the cheapest private housing in the area in which they lived. And construction expenditures had to be minimal. Subsidized housing for low-income Americans, after 1937, was scarce, low-cost and low-quality.
But the United States continued to subsidize consumers and producers of private housing, especially those at the upper end of the income distribution. Today the mortgage interest tax subsidy for the wealthiest 10 percent of Americans is larger than the entire federal subsidy for affordable housing for low- and moderate-income people.
So why does the U.S. government use public revenue to support private home ownership? Not because doing so rewards hard work, promotes social mobility or serves the good of all Americans. The United States leverages public resources to promote home ownership because of the exercise of power by key political actors, including early-20th-century housing industry elites.
Even after the Great Recession of the early 21st century, 61 percent of Americans report believing that “to own a home” is “very much” the meaning of the American Dream. Twenty-eight percent say they think it is “sort of” the meaning, and only 10 percent say they think that is not what the American Dream means. This belief pattern reflects, not exogenous preferences and the objective analysis of facts, so much as a narrative of American home ownership first spun by housing industry leaders nearly a century ago.
Clarissa Rile Hayward teaches political science at Washington University in St. Louis. Her most recent book is “How Americans Make Race: Stories, Institutions, Spaces“ (Cambridge University Press, 2013). You can follow her on Twitter at @ClarissaHayward.