The Root of the Housing Problem

Amity Shlaes has an article at Bloomberg that takes a different view of the housing problem:

Aug. 20 (Bloomberg) -- Everything will be all right if we just fix the housing problem. That was the hope investors clung to as they watched Fannie Mae and Freddie Mac crumble this week.

The presidential campaigns reflect a similar faith in housing's curative power. Senator John McCain recently suggested that not merely mortgage-loan defaults but also anxiety about those mortgages was our worst problem: ``Americans are uncertain about this crisis.''

``Three-Bedroom Ranch,'' a Barack Obama campaign commercial, suggests that America needs a ``plan to build'' for the middle-class rather than subsidize corporate interests. The candidates seem to believe that recovery is something with French doors and a new roof.

But what if houses aren't a haven but a prison? What if even a booming real estate market itself is a problem? That's the theory of a winning Phelps -- not Michael Phelps, the Olympic swimmer, but Nobel Prize economics laureate Edmund Phelps of Columbia University. Phelps deplores the collective energy Americans spend on family housing.

``It used to be said that the business of America was business,'' Phelps says. ``Now the business of America is homeownership.'' To grow optimally, he says, America needs to get beyond its house passion.

It seems obvious to me that since the government subsidizes home ownership, we probably invest too much in housing. The mortgage tax breaks, as well as the subsidy provided by a Federal Reserve keeping interest rates too low, traps too much of our capital in the housing market. If the government removes the subsidy, that capital would be invested in more productive activities.