Dimensions: 6'' x 9'' 220 pages AEI Press  (Washington) Publication Date: December 2008 Paperback ISBN: 978-0-8447-4273-1 Price: $ 20.00 Add to Cart   Examination Copies

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Despite the recent drop in house prices, housing remains unaffordable for many ordinary Americans. Particularly along the coasts, housing remains extremely expensive. In Rethinking Federal Housing Policy: How to Make Housing Plentiful and Affordable, Edward L. Glaeser and Joseph Gyourko explain why housing is so expensive in some areas and outline a plan for making it more affordable.

Policymakers must recognize that conditions differ across housing markets, so housing policies need to reflect those differences. The poor and the middle class do not struggle with the same affordability issues, so housing policy needs to address each problem differently. The poor cannot afford housing simply because their incomes are low; the solution to that problem is direct income transfers to the poor, rather than interference with the housing market. 

In contrast, housing is unaffordable for the middle class because of local zoning restrictions on new home construction that limit the supply of suitable housing. The federal government can sensibly address this issue by providing incentives for local governments in these markets to allow more construction.

Ironically, current subsidies for construction of low-income housing only tie impoverished Americans to areas where they have limited job prospects. These supply subsidies also crowd out private-sector construction and benefit politically-connected developers. Mortgage interest deductions, which are intended to make housing more affordable for the middle class, simply allow families who can already afford a house to purchase a bigger one. In restricted, affluent markets, these deductions increase the amount families can pay for a house, driving up prices even higher.

Glaeser and Gyourko propose a comprehensive overhaul of federal housing policy that takes into account local regulations and economic conditions. Reform of the home mortgage interest deduction would provide incentives to local governments to allow the market to provide more housing, preventing unnecessary price inflation. Federal subsidies for the production of low-income housing should be eliminated and the funds reallocated to increase the scope of federal housing voucher programs which allow poor households to relocate to areas of greater economic promise.

A radical rethinking of policy is needed to allow housing markets to operate freely--and to make housing affordable and plentiful for the middle class and the poor.

Edward L. Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard University.

Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate and Finance at the Wharton School of the University of Pennsylvania.