From Georgia State University and the department of “let’s just all live in uniform state sponsored mud huts“, comes this latest inanity, blaming carbon emissions on your ability to get a tax deduction for the American Dream of owning your own home. I wonder what sort of home Kyle Mangum lives in?
US housing policies increase carbon output, Georgia State University research finds
Land use policies and preferential tax treatment for housing – in the form of federal income tax deductions for mortgage interest and property taxes – have increased carbon emissions in the United States by about 2.7 percent, almost 6 percent annually in new home construction, according to a new Georgia State University study.
Economist Kyle Mangum, an assistant professor in the Andrew Young School of Policy Studies, measures the effect of various housing policies on energy use and carbon output in “The Global Effects of Housing Policy,” which he recently presented at the IEB III Workshop on Urban Economics in Barcelona.
Mangum’s empirical study uses data on local construction activity, housing consumption and density, labor and materials cost, and local populations and incomes for the nation’s 50 largest metro areas, ranking them by annual carbon output per person.
Policies that affect the amount of housing consumed per capita and housing density are the two major drivers of carbon savings, he finds.
“Larger homes consume more energy,” Mangum said. “Lower density home sites increase gasoline use. Also, many ‘easy-building’ Sun Belt regions that have attracted more new home building are higher energy-use locations.”
His research suggests removing federal tax subsidies for housing and updating land use regulations to encourage higher density in higher energy-use locations would lower the country’s overall energy use, reducing its carbon emissions.
“I find that the federal tax treatment of housing has added a nontrivial amount of carbon output by increasing housing consumption,” he said. “Also, imposing stricter land use regulations in high carbon output cities would decrease the nation’s overall amount of carbon output by approximately 2.2 percent – about 4.5 percent in new construction – primarily by decreasing the amount of house used per person and then by encouraging movement to more efficient low-carbon cities.”
Mangum also finds:
High carbon cities contribute about twice as much per person as the low carbon cities;
Many quickly growing cities are above the national average in energy consumption;
Cities with more housing area per person use more electricity per person.
Download a copy of Mangum’s working paper at http://www.ieb.ub.edu/files/PapersWSUE2014/Mangum.pdf.
Bruce Cobb says:
June 18, 2014 at 12:08 pm
“There many good, sound, logical reasons for eliminating the home mortgage deduction, possibly replacing it with a credit instead. Reducing “carbon” just doesn’t happen to be one of them.
http://www.cbpp.org/cms/?fa=view&id=3948”
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First off, everyone needs to correctly refer to it as a mortgage interest deduction not a mortgage deduction. Otherwise those that are not familiar with it may mistakenly assume that the entire mortgage gets to be claimed as deduction.
Thanks for the link. It seems that most of the objections to the home mortgage interest deduction are directed at how it is administered and how the tax code handles it. I would agree that the original idea has sound merits but as usual the government over complicates things and screws it up. Any of the proposed remedies look like they still do the same thing.
@Tom in Florida
Agreed.
And you reached this conclusion that the mortgage interest deduction has a “very tiny effect in a few specific cases” how? You keep saying things without attribution. I gave an example that indicated a 16% increase in the purchase price. Please explain how the basis for your claims.
more soylent green! says:
June 18, 2014 at 2:36 pm
“And you reached this conclusion that the mortgage interest deduction has a “very tiny effect in a few specific cases” how? You keep saying things without attribution. I gave an example that indicated a 16% increase in the purchase price. Please explain how the basis for your claims.”
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I do not recall any example where you showed that unless you are referring to this:
(more soylent green! says:June 17, 2014 at 3:33 pm)
“It’s even worse than we thought! This posting estimates the mortgage deduction raises the price of a home by not 5 per cent, not 10 per cent but 16 per cent! Yep, it costs 16% more to buy a home if this source is correct.”
Quoting the post is not an example by you. I base my claims on real world experience as a Realtor. I know why homes are priced the way they are, it was my business to know. Never once did the mortgage interest deduction come into play when figuring out a comparable selling price. This deduction was used as a selling point by lenders to put a positive spin on how much interest they were charging. Since the mortgage interest deduction has NOTHING to do with monthly cash flow, which is the basis for qualifying for a home loan, it does not effect the selling price. A seller can ask any price he wants but if there are no buyers at that price, it is over priced. If a home sells immediately it was probably under priced, but that may be OK with the seller depending on circumstances. And that point, the circumstances and motivation of the seller has far more influence on the asking price than anything else. You must understand that real estate is local in nature, which means that very local conditions influence the market very much. Investor participation in the local market is another influence on local prices. So is location. I am sure you know the saying, real estate is about 3 things: location, location, location. One of the reasons for the housing market crash was that people were buying off the internet without regard to local conditions around the property. There were too many overpriced sales because of this especially from investors who suddenly found themselves with negative cash flow on their investment. Panic would set in and they would dump these properties on the market in hopes of cutting their losses. Then there were all the news reports about people being underwater on their home loans and more panic was created. This consequent deluge of properties for sale immediately changed what was a seller’s market into a buyer’s market. But it also slowed sales as buyers were now being cautious and waiting in hopes of riding the price down. No where in all of this does the mortgage interest deduction have any effect. But what makes housing prices rise you may ask. Same thing in reverse, motivated buyers in a location with a declining inventory. Under these conditions, fear that prices will continue to rise will motivate a buyer to take action quickly when they find a property they want. Perceiving a value that is greater than the cost is another motivator for buyers. When buyers are motivated prices rise.
Now I have given you some real life reasons for housing price fluctuations and none of them include the mortgage interest deduction.
Do my home grown tomatoes in my “less dense” living area do anything to offset my outrageous carbon footprint? How about my fruit trees?
catweazle666 says:
June 17, 2014 at 4:19 pm
So where do all those “high density” areas put the snow when it falls?
Underground colonies, like ants – that’s the ultimate solution, by Mangum’s logic. It looks like China might already be headed in that direction – with some possible complications ?
Tom in Florida (June 18, 2014 at 5:01 pm) “Now I have given you some real life reasons for housing price fluctuations and none of them include the mortgage interest deduction”
Of course the mortgage tax deduction doesn’t cause any price fluctuations. That’s because it is a permanent distortion in investment due to preferential federal and state tax treatment. The only way that a mortgage tax deduction makes sense is to tax all homeowners on the free rent they get by owning a home. Currently, homeowners get tax-free imputed rental income while deducting interest and property tax expenses on that income. In all other cases businesses must pay tax on the imputed income before they are allowed to deduct those expenses.
Perhaps it is good social policy to encourage that extra investment in primary, secondary and even tertiary owner-occupied residences. But even benefitting as a primary owner myself I would rather do away with that and all other investment distortions, thus growing overall productivity.
eric1skeptic says:
June 19, 2014 at 3:17 am
“Of course the mortgage tax deduction doesn’t cause any price fluctuations. That’s because it is a permanent distortion in investment due to preferential federal and state tax treatment. The only way that a mortgage tax deduction makes sense is to tax all homeowners on the free rent they get by owning a home.”
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All home owners do not qualify for the mortgage interest tax deduction.. In the link cited by Bruce Cobb earlier only half of home owners with mortgages are able to use the deduction. Of course that does not include owners who have no mortgage. So a “tax them all” policy is ridiculous.
And the notion that home owners get “free rent” is simplistic. Local government income is based on property taxes which are assessed usually as a percentage of fair market value. Home owners are much more likely to maintain and improve their property keeping market values higher than non owner properties. Those higher values translate into higher property taxes which benefit the whole community. That is especially true of school taxes. Being an ad valorem tax, school taxes are based on property value not the number of children in school. My school tax makes up over 50% of my ad valorem taxes yet I have no children in school. A renter who has children in school pays no school tax. Now if you want to address energy use, once again home owners lead the way in energy use reduction upgrades, mainly because of the financial benefit of lower bills and increased value. Neither renters nor their landlords have any incentive to improve the energy efficiency of the property being rented.
I suppose we could go back and forth all day and night on this subject each citing what is good and what isn’t about this policy, it is a complicated subject. But I will disagree that the home mortgage interest tax deduction does anything to distort the housing market because as I said earlier other factors totally swamp that effect.
What this deduction actually does is reduce the overall cost of a home loan. But that does not mean a person will pay more for a property, it means they can buy a better property. And it is the lender who benefits because the reduced cost does not affect his bottom line. It also allows a mortgage broker to sell a higher rate under the sales pitch that the practical interest rate is lower because of the deduction. And of course, the mortgage broker gets paid a commission on selling the higher rate.
Tom,
You fail to understand the mortgage interest rate deduction is a fixed distortion to the market. You do make several arguments to distract from the point at hand. There are several benefits and downsides to the mortgage interest tax deduction and whether it’s a net good or bad is largely a matter of opinion, political orientation and self-interest. I cannot find one source anywhere to support your claims that this tax deduction does not distort the market. Quite the contrary, it’s well recognized.
But I understand your desire to keep your commissions high. You keep repeating the standard rhetoric of the real estate industry.
Tom in Florida (June 19, 2014 at 5:39 am) “And the notion that home owners get “free rent” is simplistic.(1) …. Those higher values translate into higher property taxes which benefit the whole community. (2) …Neither renters nor their landlords have any incentive to improve the energy efficiency of the property being rented. (3)”
On (1), There is a discrepancy between businesses which deduct expenses from imputed income and homeowners who take deductions against their other income. Your first paragraph about some people not taking the deduction proves the case even more strongly, it is simply a middle class handout. On (2) you ignore the many downsides of overpriced housing. On (3) both landlords and tenants would want to lower their costs.
You conclude: “What this deduction actually does is reduce the overall cost of a home loan. But that does not mean a person will pay more for a property, it means they can buy a better property. And it is the lender who benefits because the reduced cost does not affect his bottom line. It also allows a mortgage broker to sell a higher rate under the sales pitch that the practical interest rate is lower because of the deduction. And of course, the mortgage broker gets paid a commission on selling the higher rate.”
That’s all true and all devoid of any benefit to the economy. On the contrary, it misallocates resources. OTOH there are many (e.g Keynesians, although I’m not saying you are one) who believe that politically directed economic activity (versus privately decided economic decisions) can lead to more overall growth. Build a bunch of houses nowhere and then build a bridge going there. The other aspect you may be ignoring is that housing is consumption, not investment.
probono says:
June 19, 2014 at 12:03 am responding to…
catweazle666 says:
June 17, 2014 at 4:19 pm
So where do all those “high density” areas put the snow when it falls?
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Good point, but remember the old Soviet saying, “We pretend to work and they pretend to pay us.”
By then, everyone will be a government employee, so who cares if it snows?
H.R. says:
June 19, 2014 at 10:15 am repsonding to
probono says:
June 19, 2014 at 12:03 am responding to…
catweazle666 says:
June 17, 2014 at 4:19 pm
My point was more that “higher density” areas by definition require a disproportionately higher degree of infrastructure which brings it’s own carbon footprint. I am sure the authors of this study have included that. \
Because all those 1/5th full buses displace 30 cars, don’t ya know
more soylent green! says:
June 19, 2014 at 6:54 am
eric1skeptic says:
June 19, 2014 at 7:22 am
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Distortions, overpricing and such are words used in theory and text books. In the real world the only time a real estate market is overpriced is when there is no one willing to buy or rent at those prices. As long as there are buyers and renters willing to pay the price the market is exactly where it should be at that time. As I have said before, buyers set the market. It doesn’t matter what so called experts or economists say, there is no theory that can say what should be, it is what buyers demonstrate it to be by their actions. Again I cannot stress enough how local in nature real estate is. And by local I mean just that, the real estate market within a community can be different by neighborhoods. So making a generalization that the mortgage interest tax deduction distorts the entire market by 16% has no value or real meaning.
And directly to ” more soylent green!,”
You have now said twice that real estate agents desire this deduction to keep their commissions high. You also say I am “repeating standard rhetoric of the real estate industry”.. I can only conclude that you have some kind of problem with real estate agents and their commissions. I have encountered many folks like that, some with legitimate complaints about an individual agent, but most just believe it’s all a gravy train for agents who do nothing for the money. My answer to that is 1) if you have a problem don’t use an agent, do the work yourself and 2) it you think it is that easy, get a license and join the party. But beware, you may find the gravy doesn’t taste that good most of the time.
I have enjoyed the discussion, but it is time to move on. There is a solar thread that interests me much more. But I will check back to see if you have a last word.
probono says:
June 19, 2014 at 5:42 pm
responding to…
H.R. says:
June 19, 2014 at 10:15 am
repsonding to…
probono says:
June 19, 2014 at 12:03 a
responding to…
catweazle666 says:
June 17, 2014 at 4:19 pm
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Hi, probono.
Yeah, I got your point and it was a good one.
Mine was just a little dig at the political aims of those that act in the name of saving the planet. I was just taking advantage of the chance to ‘stand on the shoulders’ of your points.
Tom in Florida,
I apologize for my tone, but my patience was wearing thin. Distortions and incentives affect supply, demand, prices and behavior every day. Largely because our government has it’s hands in everything, I’m hard pressed to think of something not subject to those factors.
Rent control. Zoning restrictions. Requirements for greenspace. Requirements or restrictions on housing density — without making any judgement on whether these are good or bad, all these distort the local market.
Federal housing policy that requires lenders to make loans to people not likely to be able to repay the loans distorts the national market, but some areas more than others. Incentives and disincentives in the federal tax code and federal tax regulations encourage and discourage certain behaviors and actions and thus affect supply and demand. I can find dozens of business writers and economists both on the left and the right who agree the federal mortgage interest tax deduction distorts the market, raises home prices, raise loan prices, incentivize people to overbuy, etc., etc. I cannot find any source which says it has no effect because of local factors.
Yes, all real estate markets are local, but the federal tax policy is not. It’s national. I wouldn’t expect the distortion to be equal in every market, but I don’t believe it to have no effect in most cases, either.
I’m gave a few links to support my statements and I’m not going to post each and every one I find. You have posted several responses, which while well-written and thoughtful, offered no supporting references.
The real estate industry fights ending the mortgage tax deduction tooth and nail, a policy I disagree with. And I do benefit from this deduction, btw. I’ve called for elimination of this deduction along with a decrease in overall tax rates. I believe the real estate industry is putting their own interests above the public good in this matter and I stand by my assertion that the primary reason is their own interest in keeping prices, and commissions high.
My father was once a broker and my mother also an agent. I have bought and sold about 10 homes (including investment properties) and my experience with agents is they are like anybody else in any other field. We recently sold a home and bought a new one. The two agents for these transactions were worth every penny. We were so please with them we bought them gifts and gave them gift cards as thank yous. We had other agents who did nothing but list our properties listed on MLS and hope a buyer’s agent brings in a buyer.
What I’m asking for are objective sources to back up your contention that the home mortgage deduction has no effect on the purchase price of a home.
Thank you