Ed Glaeser and why you shouldn’t worry if people do have preference for space

Why am I asking these questions other than my basic cussedness? By and large, my New Urbanism-y planners hate the deduction, and I get lectured about it all the time, and much of what they say doesn’t make sense to me. That said, I do not support continuing the deduction forever; consequentialist arguments for it, just like the consequentialist arguments against it, don’t make a huge amount of sense to me, either. However, there are some consequentialist arguments that my young planners miss, and we probably shouldn’t.

First, I’m concerned about fiddling with the mortgage interest deduction right now when such a large number of homeowners are in trouble already, even if I’m not crazy about it as policy. And given existing homeowners’ fragility, I really really don’t want to be fiddling with it now if it’s not an effective lever in land use policy. I want answers to the incidence questions I posed yesterday. It’s quite clear the benefit is more valuable to you the more interest you pay, but I don’t think that is the end of the story.

Second, dear planners, if you don’t question, you may miss a good opportunity for advocacy.

Glaeser doesn’t make this mistake. (I think he makes some others, which I’ll blog about next week). His major point here is that you can satisfy the preference for more space by building up instead of out, and that the problem of affordability in Manhattan has been due to height restrictions and overly aggressive preservation efforts than running out of land on Manhattan. His logic is good, as is his analogue: Chicago, where height restrictions have been less prevalent.

Jon Levine at the University of Michigan has argued extensively that zoning and restrictions of this ilk restrict housing choice: that there is a market for people who, under existing conditions, get forced into single-family homes who would normally go row house or big condo if there were diversity supplied in the housing market. A skylarking theory, for which I have no proof: Building multifamily is so politically unpopular that when you do get to do a project, cities I think often pursue as many units as they can because housing affordability is such an issue. There are probably economies of scale in conflict negotiation over multifamily structures. That means you aren’t necessarily developing a lot of luxury high rises anywhere except in the most expensive areas, and your troubles with neighbors there mean that your luxury high rises are *really* luxury—a small segment of your potential market.

The only way to test this issue is by easing zoning regulations and see what develops in the US. You can try comparative studies but I think it’s hard to generalize to the US at this point.

Again, I don’t see the mortgage interest deduction as a barrier to this type of development–the opposite, in fact, because even with building diversity and building up, there’s only so much land available in cities. Urban land is more expensive than land the on the fringe, for a variety of reasons, and that relationship is stable, always conveying a relative advantage for fringe development for those whose tastes go for more space. That price difference exists regardless of the deduction. By cheapening credit, you increase the possibility that, with less restrictive zoning, people can use the cheaper credit to substitute amenities for space if that is their preference.

Thus the issue is less the fact that space is a normal good that the deduction amplifies–that is probably true, but it is probably heightened by the relative lack of supply for other things in the market that one might select, given greater purchasing power. If, as my young planners and Richard Florida hope, urban condo development is the way of the future in housing in the US, making all housing more expensive by eliminating the deduction (a statement we can only make if we believe certain things about incidence) strikes me as a bit counterproductive, even if you do think rentals will be more important in future housing markets.

4 thoughts on “Ed Glaeser and why you shouldn’t worry if people do have preference for space

  1. On issue on the supply side constraints is that condos and co-ops were exceedingly rare until about 20 years ago. The condo model came from Puerto Rico in the early 1960s, and co-ops were never very popular except in NYC. Condos and co-ops also come with additional common charges which are generally far larger than any tax benefit. As more single family new construction is built in HOAs (about 60% of new construction nowadays), these extra fees are normalizing across housing types.
    Ultimately I think the deduction is bad policy but not as causal as many opponents claim. There was certainly a lack of multi-family supply during the early post-war years, but this seems to be explained by a lack of multi-family models, not the mortgage deduction. Here is a paper I liked on this issue:
    Condominium and Cooperative Housing: Transactional Efficiency, Tax Subsidies, and Tenure Choice
    Henry Hansmann
    The Journal of Legal Studies , Vol. 20, No. 1 (Jan., 1991), pp. 25-71
    Published by: The University of Chicago Press for The University of Chicago Law School
    Article Stable URL: http://www.jstor.org/stable/724453

  2. If any of my points came across as ad hominem, I apologize. They were not intended as such. I think your points are important to consider, especially as you’ve clarified them above.

    Regarding the article (and it’s my fault for being lazy and not finding the original CBO source after I discovered the link to it within the article was broken), the deduction is little used in terms of the percentage of total tax filers who use it (27). But if those filers live disproportionately in sprawling, suburban homes (an unconcentrated concentration, as it were), that can impact urban form.

    I agree with you that altering other policies–zoning, height restrictions, etc.–can improve housing affordability. And I agree that there is value in home ownership–building equity, social stability, personal investment in community, etc.

    Opportunity for advocacy: So maybe if now is the wrong time to eliminate the deduction, what if it’s altered in a way that might provide positive personal and social externalities? For example, it could be tied to energy retrofits in one way or another. Something tells me I’m opening a new can of worms (great idea, let’s add debt to homeowners whose homes may already be worth less than they currently owe for them!), but I’m just thinking here.

    Another option could be to legalize what I hear is already occurring so that more people can take advantage of it: multi-family occupancy of single-family homes. That could potentially help people pay their mortgages, make housing more affordable, and extend the proportion of the population, particularly relatively lower income, who stand to benefit from the deduction. And those who, in the face of increased opportunity cost, still want more space or privacy or the American Dream or whatever, can maintain their living situation the way it is.

    Admittedly, I don’t know if that’s feasible or what other effects that would have; it could further hollow out declining urban cores or it could lead to half of underwater mortgages being abandoned as their holders move in with the holders of the other half, I don’t know. Lots of speculation and little evidence here. As always, I’m interested to read your take and/or that of the other professorial commentators on here, especially when it makes me question what I think.

  3. See, this is where I am heading. What about a limitation that you only get the deduction on homes <3,000 square feet but with no restriction on home price?

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