Quick Thoughts on Incentives and Disincentives: Housing Market

A quick thought today, brought on by a brief Twitter exchange that is otherwise unrelated.

It is an economic law that you get more of what you subsidize, and less of what you tax. Human beings are remarkably good at responding to incentives and disincentives.

So we subsidize solar power, EVs and corn — voila, a lot more solar panels, Teslas and corn syrup in everything.

We punish/disincentivize things like cigarettes, alcohol, and firearms typically through taxes that have little to do with revenue generation, and also through other laws and regulations that discourage smoking, drinking and shooting.

What got me wondering is the application of this logic to the housing market. What do we subsidize, and what do we tax?

We subsidize:

  • Mortgages (via mortgage interest deduction and the GSEs)
  • Low-income rent (Section 8 vouchers, etc.)
  • “Hiring” real estate agents (exemption from W2 status is a subsidy to brokerages)
  • Flood insurance
  • 1031 exchanges

We tax:

  • Every aspect of construction (plus, the building permits are ridiculously cost-prohibitive in many parts of the country)
  • Owning land (property taxes)
  • Hiring people (payroll taxes)
  • Making money (income taxes)
  • Doing business (sales tax)

Can we actually solve our problems without looking at incentives and disincentives?

Just flip the list above around, for the sake of thinking about it.

Imagine if we subsidized construction, owning land, hiring people, and making money?

And we taxed mortgages, low-income rentals, made real estate agents into W2 employees, taxed flood insurance and 1031 exchanges.

One imagines the natural consequences would be a lot more homes and condos for sale, a lot more people wanting to become home and land owners, a lot more businesses hiring people, and a lot more people wanting jobs. Conversely, we’d have a lot fewer mortgages, fewer low-income rentals, fewer agents, few homes in flood zones, and fewer real estate investors. There are tradeoffs obviously, because everything in life is tradeoffs; but given where we are as a country and as an industry, I wonder if it isn’t time to start thinking about making different tradeoffs.

Just Sticking to Housing

So let’s think out loud about just the housing piece.

Imagine if we started to subsidize construction, rather than purchase. For example, Fannie/Freddie/etc. would no longer guarantee/subsidize mortgages but guarantee/subsidize construction loans. We would get more housing built, because you get more of what you subsidize.

Because we are no longer subsidizing mortgages, builders would need to build smaller, cheaper housing that more people can afford with higher-rate, shorter-term unsubsidized mortgages. Naturally, the price of homes would drop.

If we want to prioritize ownership society instead of #renternation, the next obvious reform is to eliminate property taxes but increase taxes on rents. Investors might find it financially sensible to convert their older rentals into for-sale units, whether condos or SFR, while today’s renters might find it far more advantageous to buy a place than to continue to rent.

No longer subsidizing low-income rentals has some real short-term pain as we transition residents who can’t afford market-rate rents; we will likely need some lead times for transition. However, it may be that such low-income families could become owners instead, since we are subsidizing construction and ownership and incentivizing ownership over renting.

No longer subsidizing the “hiring” of independent contractor real estate agents means fewer agents, but those remaining would be far more productive. Somewhere between 5 and 6 million homes get sold every year in America, whether we have 1.5 million REALTORS or 750K REALTORS. Here’s one chart of annual exiting home sales from TradingEconomics:

source: tradingeconomics.com

Note that in 2000, about 5 million homes changed hands — about the same number as 2022 is shaping up to be. But in 2000, there were 766K REALTORS; in July of 2022, there were 1.6 million REALTORS. Appears to me that we don’t need to encourage the hiring of real estate agents much at all. We could easily lose 50% of REALTORS and service the consumer demand. We did in 2000, with far less automation and technology, after all.

Just something to think about. What do we incentivize? What do we disincentivize? Are we surprised at the results we are seeing based on incentives and disincentives?



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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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2 thoughts on “Quick Thoughts on Incentives and Disincentives: Housing Market”

  1. interesting take and one that I have thought a lot about. I would argue all incentives and disincentives should be eliminated. Let the free market decide.
    Think of the countless billions of dollars thrown at incentivizing home ownership, only to see the US at the middle of the pack in terms of homeownership rate worldwide.
    All the taxes, fees, and regulations have done nothing but impede natural market forces.

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