In 2002, President George W. Bush, trumpeting “the ownership society,” proclaimed, “We want everybody in America to own their home.” Never mind the bursting of the housing bubble; it’s still the Washington creed. That’s why Fannie Mae and Freddie Mac, the government agencies that now guarantee most home loans in the U.S., just announced that they will guarantee mortgages for first-time home buyers who make down payments of just three per cent. Advocates argue that this will make it easier for low-income families to buy homes, and will give a boost to the sluggish housing market.

It’s an easy sale to make. Since the nineteen-thirties, the U.S. government has been committed to the idea that homeownership is an unalloyed good. The list of things the government does to support the housing industry is long. The Federal Housing Administration offers low-interest mortgages. Fannie Mae and Freddie Mac, by repurchasing and guaranteeing mortgages, help hold down interest rates. Homeowners get a variety of tax breaks, including a mortgage-interest deduction and a property-tax write-off, which add up to more than two hundred billion dollars a year in lost tax revenue.

Yet it’s far from clear that these programs actually do much to increase the over-all number of homeowners. Other Western countries don’t have anything like our range of pro-housing enticements, and their rates of homeownership aren’t much different from ours. The main impact of the mortgage-interest deduction and other subsidies is not that they get people to buy houses. It’s that they get people to buy bigger, costlier houses than they otherwise would. The bigger your mortgage, the larger the tax deduction you get. This is why real-estate agents, during the housing boom, advised their clients to buy as big a house as possible, since the government was helping them pay for it. The result is that almost all the economic benefits of the mortgage deduction go to people earning more than a hundred thousand dollars a year. The average middle-class homeowner saves little or no money. As Dennis Ventry, a tax expert and law professor at U.C. Davis, told me, “It’s a classic upside-down subsidy: it goes to all the wrong people. If you really want to help people buy homes who otherwise wouldn’t, we’ve chosen exactly the wrong tool.”

All these tax breaks do inflate housing prices, but are expensive homes really better for society? A major reason for the low-down-payment program is that homes, even after the crash, are priced beyond the means of many Americans. And though that program may turn more low-income people into homeowners, it also means that more lower-income homeowners will default. According to estimates from Dean Baker, a left-leaning economist at the Center for Economic and Policy Research, the default rate for mortgages with down payments of three to ten per cent is almost fifty per cent higher than the default rate for mortgages with down payments above ten per cent. There’s another problem: transaction costs mean that you need to stay in a home for at least five years, on average, for ownership to make financial sense, but, as Baker told me, “low- and moderate-income households have less stable jobs, less stable family situations, and are more likely to have to move, which means that many of them are not going to own a home long enough to be able to recover their original investment.” The real winners are the banks, which can make these loans without worrying about risk; the government—the taxpayer—has them covered.

If the social benefits of all these subsidies are questionable, the costs are plain. They lead Americans to overinvest in housing and underinvest in other kinds of assets. Most Americans have nearly all their wealth tied up in their homes. That’s risky for them and for the economy as a whole, as we saw during the financial crisis. Housing doesn’t have the kind of spillover benefit that you get from investments in other areas, like research and development, or even infrastructure, and it’s an inherently unstable business, being at once cyclical and illiquid. When the economy is doing well, people pour more and more money into housing; when the economy is doing poorly, they stop. So, as a number of studies have found, the housing industry tends to amplify the economy’s ups and downs. Consider the housing bubble of recent memory: while it was inflating, the economy grew much faster than it otherwise would have. But, when the bubble burst, the downturn was incredibly severe. The government has been subsidizing a notoriously manic-depressive sector of the economy.

Unfortunately, the housing industry is a powerful lobby. Homeowners are wary of anything that might threaten their most valuable investment. And, because the government uses subsidies and tax breaks to boost the housing market, it’s easy to underestimate just how expensive these policies really are. It’s only when you think of all the other things that we could be spending that money on—education, say, or technological or medical research—that the real cost of our addiction to housing becomes clear. A big house may be great for the people who live in it. But should taxpayers really help foot the bill for their mortgage? ♦