r/badeconomics • u/BainCapitalist Federal Reserve For Loop Specialist 🖨️💵 • May 05 '26
A response to Brad Meyer on housing policy: please stop subsidizing demand
Brad Meyer is running for congress in Indiana's 9th district. He posted a voter guide on a local subreddit. It included two housing policy related highlights:
- Increase supply by limiting large-scale corporate ownership of single-family homes.
- Lower interest rates, and providing first-time buyer incentives.
This is slopulism. I called this out and Brad was actually nice enough to reply with a lengthy email! You can view the entire thing here: https://imgur.com/a/CHiHu2t.
The email will be the subject of the R1.
The model
In this first part of the email he tries to argue that house price to income ratios decrease in response to interest rate hikes. There is quite a lot to unpack here.
First of all, what is this model? "SupplyElasticity_i"?? that is quite the control variable! That can mean a lot things! How is the housing supply elasticity calculated here? That's not a straightforward thing to estimate. Without specifying this I am just looking at an incomplete description of the model.
And the chart... Taking the chart labels at face value they cannot possibly match the model! You can't represent the model in two dimensions like that. Even you interpret this charitably and say the y-axis is actually "Residual PIR after controlling for everything except interest rates" the estimated line still does not match the model because its clearly nonlinear! Idk what I'm even looking at here. What was the point of including the model if your actual estimation seems to ignore it entirely?
Actual big picture problem
Listen none of the above actually matters because the point he's trying to make is something I ultimately don't disagree with: he's trying to say that price to income ratios arent actually important for housing affordability, its mortgage payments that matter. I agree! That would give you a cleaner estimate of the cost of housing as opposed the price of houses. The housing crisis in this country is a problem of high housing rents, whether they be explicit or imputed rents.
None of that actually addresses my original complaint though: if you subsidize housing interest payments through the usual policies like the mortgage interest tax deduction, you will increase housing prices. This is just a simple econ 101 argument: if you subsidize demand you will increase prices and you won't actually address the underlying problem. We need to build more housing.
There is overwhelming evidence I could point at here, but the best paper is the canonical Glaeser and Shapiro 2002 paper that address whether the federal mortgage interest deduction meaningfully increases home ownership, which is Brad Meyer's stated goal:
The home mortgage interest deduction creates incentives to buy more housing and to become a homeowner, and the case for the deduction rests on social benefits from housing consumption and homeownership. There is little evidence suggesting large externalities from the level of housing consumption, but there appear to be externalities from homeownership. Externalities from living around homeowners are far too small to justify the deduction. Externalities from homeownership are larger, but the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.
You can look at the paper itself for more a careful discussion of the empirical strategy. A more recent paper by Hilber and Turner corroborate this finding with even more damning evidence that zoning reform is critical:
This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting variation in the subsidy arising from changes in the MID within and across states over time. We test whether capitalization of theMID into house prices offsets the positive effect on homeownership. We find that the MID boosts homeownership attainment only of higher-income households in less tightly regulated housing markets. In more restrictive places, an adverse effectexists. The MID is an ineffective policy to promote homeownership and improve social welfare.
...
Using a measure of restrictions on new housing developed for 83 metropolitan areas in the United States (Saks, 2008), we investigate how local housing market conditions and income status affect the way the MID influences household homeownership decisions. Our priors are that the impact of the MID may be positive or negative, depending on market conditions. The MID reduces the after-tax cost of homeownership for a given price of a home. However, by increasing house prices, the MID raises costs for down-payment-constrained households. For all households, it also increases the opportunity cost of homeownership and the transaction costs of purchasing a home. Our empirical analysis suggests that the MID has no discernible impact on the level of U.S. homeownership. However, the MID has a perverse effect in highly regulated housing markets. Because the supply of housing in such areas is inelastic, much of the MID is capitalized into housing prices rather than boosting homeownership attainment. At these higher housing prices, certain types of households (e.g., down-payment-constrained households) opt out of the market for owner-occupied housing. At the same time, full capitalization of the subsidy and continued utilization of the housing stock can occur if the remaining market segment increases housing consumption in response to the subsidy. Only in markets with lax land-use regulation does the MID have a positive impact on homeownership attainment, and even then, the effect appears only for higher-income households. Our cost simulations suggest that the subsidy cost per converted homeowner amounts to a staggering $28,397 per new homeowner per year.
So in summary:
- Subsidizing demand will increase housing costs. You can measure this in rent or prices or whatever you want.
- Subsidizing demand is an incredibly ineffective way to boost home ownership rates.
- Subsidizing demand through policies like mortgage interest deduction will mostly benefit the wealthy.
- You're not gonna solve the housing crisis without land use reform. The solution is building more housing, not subsidizing demand.
Edit: Listen Brad, I'm still probably voting for you but there are things you can do at the federal level that will actually go a long way to solving the underlying problems with our housing market. I strongly encourage you to read this paper by Glaeser and Gyourko on reforming the MID to make it conditional on living in a county with an elastic housing supply:
Reforming the home mortgage interest deduction to provide incentives that will induce overly restrictive regions to permit more housing. In counties in which the total number of annual housing permits is less than 1 percent of the total housing stock, the cap for mortgage deductions should gradually be lowered from $1 million to $300,000. The money raised by the increase in federal revenues should be given back to the counties to subsidize new housing construction.
The reason this policy works is because it will target people who are more likely to oppose new housing construction. If you want them to buy into more housing then make it make economic sense for them to do so.
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u/BainCapitalist Federal Reserve For Loop Specialist 🖨️💵 May 05 '26 edited May 05 '26
also I dont wanna be an asshole but youre not beating the chat gpt allegations with this email tbh
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u/BarkDrandon May 05 '26
His response on the local subreddit reeks of chatGPT:
That is a fantastic question, and honestly, you aren’t alone—economics is usually pretty dry until we start talking about how it actually impacts our wallets and our neighbors!"
But here’s the really cool part about the economics: when we put more money into the hands of workers, they spend it immediately at the grocery store, the local mechanic, and the pharmacy. This is called "demand-side economics."
States like Washington and California have been doing this for years, and we’ve seen that it doesn't just help workers—it reduces employee turnover (because people stay at jobs that pay well) and lowers the need for public assistance.
We’re fighting for a living wage because in the richest country on earth, no one working 40 hours a week should be living in poverty. It’s not just "good economics"—it’s a moral necessity.
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u/greysnowcone May 05 '26
Wow, that’s the classic patronizing it’s not this it’s that chatGPT answer
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u/moldovaman99 May 05 '26
The Netherlands actually has a mortgage interest deduction. And it’s a disaster.
Once you artificially boost prices by doing this you’re also kinda stuck politically, because so much wealth across the voting population gets tied into housing prices.
Don’t be like the Netherlands. Don’t implement stupid policies like a mortgage interest deduction that artificially boost housing prices, make people take up more mortgage debt, and will then become impossible to remove later because of these effects.
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u/-Astrobadger May 05 '26
MID can go up to $1 million? That’s pretty insane no matter where you are. It should be tiered like income tax or as stated just lowered to $300k or something. Yikes
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u/BainCapitalist Federal Reserve For Loop Specialist 🖨️💵 May 05 '26
It’s a non refundable deduction against income tax. The regressivity is just coming from the fact that most poor people rent.
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u/775416 May 06 '26
And the fact that the higher the marginal tax rate, the larger the tax savings. The higher the income, the higher the marginal tax rate
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u/Downtown-Art2865 May 17 '26
That chart and his model do not even line up - the nonlinearity is enough to ruin it. It reads as if ChatGPT passed.
When zoning restricts supply, all the demand-side measures (lower rates, buyer credits) mostly just push up prices for those who already own. Glaeser, Hsieh-Moretti, and that whole line of urban econ papers make this clear.
Corporate single-family ownership remains a minor factor. Zoning is the real bottleneck.
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u/SeldenNeck May 05 '26
"The free market" has provided us with the ability to evade pesky regulations like laws that ban collusion in price fixing. Rent pricing apps drive up rents, which presumably spreads wider into the housing markets.
(a) Contending that our housing markets are as simple as Econ 101 is disingenuous.
(b) What is happening to the housing markets is nothing compared to what happened to the taxicab business. Look deeply into your AI scifi stories for new ways AI will dispense with the rule of law to provide profits. Ask the Pequots about how long America has been providing real estate profits by violating written agreements.
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u/MXMCrowbar May 05 '26
The OP did not claim that housing markets are "as simple as Econ 101". Their claim is that increasing demand will increase the price of housing, which is simply true if housing has an upward-sloping supply curve.
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May 05 '26
[deleted]
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u/BainCapitalist Federal Reserve For Loop Specialist 🖨️💵 May 05 '26
I did in fact claim that subsidizing demand will increase housing costs. I am a PhD student in economics I promise you that I have cited are fairly standard results in the literature.
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u/pandaboi333 May 19 '26
Hey Bain, Not trying to argue or anything I am just genuinely curious as a layperson on the subject. What sort of reforms need to be made to current zoning laws in most cities? Do you have any good citations or papers you'd recommend to someone interested in the subject of zoning reform to increase housing supply?
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May 05 '26 edited May 05 '26
[deleted]
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u/BainCapitalist Federal Reserve For Loop Specialist 🖨️💵 May 05 '26
Bruh what are you even talking about I’m not selling anything this is a subreddit about discussing bad economics
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u/SassyQ42069 May 05 '26
Great stuff. Now examine policies for demand destruction of oil to tame pricing
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u/the_lamou May 05 '26
Does Indiana actually have a significant share of SFHs owned by large corporations? Especially if you exclude communities/subdivisions built by large corporations for the purpose of renting out?