More bad news on the housing front today, as the housing market can't seem to find a bottom.
New-home sales fell in July by 0.7% to the lowest point since February, the Commerce Department said Tuesday. Sales for June were also revised downward to negative 2.9% from the previously reported decrease of 1%.
NYU finance professor Viral Acharya writes in his new book Guaranteed to Fail that the only way to fix the housing market is to end government subsidies like the mortgage interest tax deduction.
The less told story on such subsidies is what they have done to generate more demand and push up prices, he says. "One the one hand you are actually getting all your subsidies, but you are actually paying more for the property you would have liked to consume," says Acharya. "Therefore the real subsidy goes only [to those] at the very top. It is for people who are buying a second house. It is for people who are buying more land than they would otherwise."
Not only have government subsidies failed to really help everyday people, except to "prop up the housing market artificially," says Acharya, but the big question also remains: Who's paying for all these subsidies? "It's sort of a Ponzi scheme, because the current generation is reaping all its benefits, but we're basically scaling up our government debt in response, and someone else is going to pay for it down the road."
These big points on subsidies are never conveyed when they are sold to the American people, and all the more reason Acharya believes one day there will be political will in Congress to eventually eliminate such incentives. "Subsidies have been sold as something that actually help remove income inequality and helps us create an ownership society," says Acharya. "[But] if we convey the right message to the middle class and the poor that this has not in the end produced huge substantial benefits for them," then the subsidies will be much easier to remove.
But an end to subsidies is not a quick fix to the U.S. housing market. Pressures will still exist even without subsidies, because when the government fixed the bank problem, it really failed to address the underlying mortgage issue. That's really why the housing market continues to struggle, he says. "Just the way we recapitalized the financial sector, I think there was a very good case for recapitalizing the households," says Acharya.
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- NYU finance professor Viral Acharya