Subsidyscope

Housing

Summary

Subsidies to Housing Dwarf Those to Other Sectors

Housing—whether looking for it or living in it—is a part of every American’s life. Although shelter is a basic necessity, the housing sector encompasses a wide set of economic activities affecting everything from financial markets to the demand for commodities such as lumber. Through the use of subsidies, the federal government aims to reduce the cost of producing, purchasing or renting housing for households at a variety of income levels. These subsidies are distributed through dozens of programs, which provide grants, loans, tax expenditures or other incentives that support the construction of apartments, decrease the costs of mortgages and affect many other activities.

Subsidyscope estimates that the federal government spent $244 billion on housing-related grants and tax expenditures likely to contain subsidies in fiscal year 2009.1 The government also provided $4 billion in direct loans, and $688 billion in loan guarantees for housing-related activities, including guarantees of securities backed by loans already carrying a federal guarantee. The ultimate subsidy cost of these loan and guarantee commitments is uncertain, as most are projected to be repaid by the borrowers and some federal sources project they may result in a profit to the government.2 In addition, these estimates do not take into account administrative costs or market risk and are likely underestimates (see the discussion of Risk Transfers below).

The government's role in the housing sector increased in fiscal year 2009, as it continued funding multiple programs enacted to address effects of the 2008 financial crisis. Notably, the government took conservatorship over Fannie Mae and Freddie Mac, assuming substantial liabilities in the process.3 However, subsidy estimates for Fannie and Freddie vary based on whether the entities are considered to be on- or off-budget. For more on the costs of these and other federal actions related to the crisis, see the discussion of Risk Transfers below.

The subsidy costs of housing loans and guarantee programs are uncertain and likely underestimates, and costs for Fannie Mae and Freddie Mac vary widely. Therefore, Subsidyscope does not add them to grants and tax expenditures.

Spending on housing programs that contain subsidies confers widespread benefits to homeowners and renters, as well as the construction sector, developers, realtors and more. Subsidyscope illuminates the budgetary costs of these programs; however, any use of these data for policy evaluation must weigh those costs against the benefits they provide.

Subsidyscope relies on multiple sources of government data to calculate these estimates. As previously noted, these data may not include some types of subsidies, and may contain gaps that prevent allocating some published subsidy data to the housing sector. All of these limitations can result in omissions of federal support that may, nonetheless, influence markets. However, they are the best data available, and they provide a baseline for comparing subsidies across economic sectors. By publishing these estimates, Subsidyscope makes these data more accessible and their shortcomings can be more easily identified and, ultimately, improved.

Majority of $244 Billion in Housing Grants and Tax Subsidies Benefits Homeownership

Subsidyscope divides federal support of the housing sector into four categories: direct expenditures (grants and contracts), tax expenditures, risk transfers (such as loans and loan guarantees) and regulations. Each of these categories is summarized in the sections below. This funding is administered through a variety of agencies, including the U.S. Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), Department of Agriculture, the Department of the Treasury (Treasury) and the Federal Reserve.

The government’s housing activities can be further categorized into those that support rental housing, and those that support homeownership. As noted by the Congressional Budget Office (CBO), “most of the federal government’s support for housing is provided for homeownership.”4 Figure 1 below illustrates this, with 70 percent of the $244 billion in combined grants and tax expenditures going to homeownership activities.5

Federal support for rental activities is conveyed primarily through grant programs, while support for homeownership is conveyed largely through the tax code and other avenues (such as loans and loan guarantees). Of the $185 billion in housing tax expenditures in fiscal year 2009, about 8 percent, or $14 billion, was for rental activities. In contrast, $43 billion of the $59 billion in housing grants, or about 73 percent, was for rental activities. The remaining funding was for programs that support homeownership, or a mix of homeownership and rental activities.6

Rental activities are generally targeted to households with lower incomes, as are some homeownership activities such as Rural Housing Service loans for single family mortgages.7 However, some of the government’s largest housing expenditures are related to tax subsidies that are often used by higher income households, such as the mortgage interest deduction (MID) and the property tax deduction. These two programs cost an estimated $108 billion in fiscal year 2009.8

Figure 1: Housing Activities Supported through Grants and Tax Expenditures, FY2009

Source: Subsidyscope analysis of FY2009 data from USAspending.gov and " Analytical Perspectives." See: OMB. "Analytical Perspectives Fiscal Year 2011." pp. 210-212.

Grants and Contracts: $59.1 Billion (FY2009)

In fiscal year 2009, the federal government awarded $59.1 billion in direct grants to companies or organizations engaged in housing-related work, or about 8 percent of all grants the government awarded during that period. Subsidyscope deems all of these programs as likely to contain a subsidy, and, therefore, includes all of them in its analysis.9 Federal housing grants were distributed through more than 60 active programs; about 73 percent of this funding went to programs that support rental housing. The largest grant program in the sector is HUD’s Section 8 Housing Choice Vouchers. The program received $16.3 billion in fiscal year 2009—about 28 percent of all housing grants.10 Click here to search Subsidyscope’s database of housing-related grants.

The government spent another $0.3 billion on non-competed contracts for housing-related goods or services.11 Subsidyscope considers non-competed contracts as more likely to contain a subsidy component than competed contracts.12 Click here to search Subsidyscope’s database of housing-related non-competed contracts.

Tax Expenditures: $185.2 Billion (FY2009)

The housing sector claimed $185.2 billion in federal tax expenditures in fiscal year 2009. This figure includes some of the largest tax expenditures in the U.S. tax code. The mortgage interest deduction, which allows homeowners to claim a deduction on their taxes equal to the amount they pay in interest on their mortgage and a home equity loan (up to $1.1 million in mortgage debt), cost the federal government $79.4 billion in lost revenue in fiscal year 2009. The vast majority, about 92 percent, of housing-related tax expenditures benefit homeownership activities.13 Click here to read more about tax expenditures for housing, and here to explore Pew's Tax Expenditure Database.

Risk Transfers: Increasing in Response to Financial Crisis

The federal government provides loans and loan guarantees in the housing sector, assuming financial risks that otherwise would be borne by investors or other entities. Through such “risk transfers,” the government has made a substantial financial commitment to the sector. In fiscal year 2009, more than $4 billion was directly loaned to individuals or companies for the purpose of financing homes. Also in fiscal year 2009, federal agencies issued guarantees totaling $688 billion on loans for housing-related activities; this includes guarantees of securities backed by mortgages on single- and multi-family homes already carrying a federal guarantee. This loan guarantee amount is approximately three times the $230 billion committed in 2008; the growth was primarily due to increases in guarantees issued by the Federal Housing Administration and Ginnie Mae.14

Although the amount of loan and guarantee commitments illustrates the breadth of the government's role in the housing sector, it does not measure the subsidy costs that will ultimately be incurred. Most of these commitments are likely to be repaid by the borrowers. In fact, if subsidy rates calculated by the government according to the Federal Credit Reform Act are applied, the direct loans would be projected to cost under $0.3 billion, and the loan guarantees would be projected to generate over $1 billion in earnings for the government.15 However, these estimated subsidy rates do not include the costs of administering the programs or market risk (which arises from volatility in the economy)—the main sources of the implicit subsidy of getting a loan with better terms than are available in the competitive market. Therefore, the government likely underestimates the subsidy.16 For more information, see Subsidyscope's risk transfers page.

In late 2008, the government took conservatorship of Fannie Mae and Freddie Mac in an effort to stabilize their declining finances; this was one of several steps taken by the government to bolster the housing market and the secondary credit markets which support it. The cost of conservatorship varies, depending on whether it is measured as federal outlays to Fannie Mae and Freddie Mac for stock purchases (off-budget), or calculated as the projected future costs of their portfolio at the time the government took on their liabilities (on-budget).17 According to the Federal Housing Finance Agency, the government provided a net $93 billion to Fannie Mae and Freddie Mac in fiscal year 2009 by purchasing preferred stock from these two housing-related government sponsored enterprises (GSEs).18 On a fair value basis, the CBO has estimated the subsidy cost of taking on their liabilities to be $291 billion in fiscal year 2009.19 Federal agencies also purchased more than a trillion dollars of mortgage-backed securities issued or guaranteed by GSEs, among other activities related to the government response to the financial crisis.20

It is difficult to analyze the extent to which some of these actions contain subsidies specific to the housing sector. Subsidyscope presents these activities in order to illustrate the government's role in this sector; these estimates should be used with caution as it may take several years to determine how much subsidy they will ultimately convey. Click here to read more about risk transfers in the housing sector.

Regulations: Subsidy Costs Undetermined

The federal government subsidizes the housing sector through regulations, which can significantly affect particular producers or consumers. Unfortunately, there is no way to methodically identify and quantify these subsidies. Subsidyscope's regulations page describes some of the regulations that may create subsidies in the housing sector. Click here to read more about regulations in this sector.

Structure of Sector

In addition to the pages above, Subsidyscope broadly examines the size and scope of the housing sector in the United States and explains the economic rationale for government intervention here.

  1. Subsidyscope analysis of data in USASpending.gov and "Analytical Perspectives." See: Office of Management and Budget (OMB). "Analytical Perspectives Fiscal Year 2011." pp. 210, 212.
  2. Subsidyscope analysis of data from the Federal Credit Supplement, FY2009 and FY2010. Tables 1 and 2.
  3. The Federal Housing Finance Agency (FHFA) announced that it placed Fannie Mae and Freddie Mac into conservatorship on September 7, 2008. See: "Statement of FHFA Director James B. Lockhart." p. 5.
  4. Congressional Budget Office (CBO). "An Overview of Federal Support for Housing." November 3, 2009. p. 1.
  5. Subsidyscope analysis of data in USASpending.gov and "Analytical Perspectives." See: OMB. "Analytical Perspectives Fiscal Year 2011." pp. 210, 212.
  6. Ibid.
  7. Foote, Bruce E. Congressional Research Service (CRS). "USDA Rural Housing Programs: An Overview." May 11, 2006. pp. 3-4.
  8. Subsidyscope analysis of data in "Analytical Perspectives." See: OMB. "Analytical Perspectives Fiscal Year 2011." pp. 210, 212.
  9. Subsidyscope deems that a grant program is likely to contain a subsidy if it meets the criteria outlined here. For example, a program that provides grants for the removal of lead-based paints in homes or apartments would be considered likely to contain a subsidy to the housing sector.
  10. Subsidyscope analysis of USAspending.gov.
  11. Ibid.
  12. Subsidyscope focuses on non-competed contracts because they are more likely to be priced at above fair market values. By contrast, competed contracts can result in lower costs and/or better quality goods and services.
  13. Subsidyscope analysis of data in "Analytical Perspectives." See: OMB. "Analytical Perspectives Fiscal Year 2011." pp. 210, 212.
  14. Subsidyscope analysis of data from the Federal Credit Supplement, FY2009 and FY2010. Tables 1 and 2.
  15. Ibid.
  16. CBO. "Assessing the Government’s Costs for Mortgage Insurance Provided by the Federal Housing Administration." July 19, 2006. p. 1.
  17. CBO. "CBO's Budgetary Treatment of Fannie Mae and Freddie Mac." January 2010. pp. 2-3, 13.
  18. Subsidyscope analysis of data from the Federal Housing Finance Agency (FHFA). This amount nets out dividend payments made to Treasury totaling $4 billion (for a gross of $97 billion) in fiscal year 2009. See: Table 1: Quarterly Draws on Treasury Commitments to Fannie Mae and Freddie Mac per the Senior Preferred Stock Purchase Agreements and Table 2: Dividends on Enterprise Draws from Treasury in "Data as of October 1, 2010 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage Related-Securities."
  19. CBO. "Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market." December 2010. p. 4. In CBO's update to "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," the fiscal year 2009 outlays related to Fannie Mae and Freddie Mac reflect cash transfers from Treasury to the GSEs (rather than the subsidy cost of their guarantees adjusted for market risk). For more information, see: CBO. "The Budget and Economic Outlook: An Update." August 2010. pp. 18-19.
  20. Subsidyscope analysis of data from the OMB and the FHFA. See: OMB. "Analytical Perspectives Fiscal Year 2011"; and FHFA. "Data as of October 1, 2010 on Treasury and Federal Reserve Purchase Programs for GSE and Mortgage Related-Securities." Tables 3, 4 and 5.

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