How the Federal Government Dramatically Skews the U.S. Real Estate Market

A new report details the $450 billion annual federal investment in what gets built in America.

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One of most persistent canards about American communities is the idea that they’ve been built entirely by demand. People live in the suburbs because they want to. Drivers commute on highways by choice. The market long demanded single-family homes and strip malls, and so that's what the invisible hand delivered.

Of course, plenty of people do want to live in single-family suburban homes, and they happily choose to get from there to the office, the grocery store and the kids' school by car. But in the aggregate, the built environment we’ve created in American cities, suburbs and rural towns owes much more to the federal government than it does the free market. Not buying it? Here’s a price tag: According to a new report released this morning by Smart Growth America, the federal government influences our real estate sector – with tax credits here, loan guarantees there, grants and other programs – to a tune of more than $450 billion a year.

All that money (and the incentives implied by it) subtly skews what we build. Meanwhile we keep talking about about other, more obvious interventions in the real estate market, like regulation through zoning codes and infrastructure decisions about where to put roads and sewer lines.

"Even if you don’t believe those [factors are influencing real estate], you sort of have to believe that if you’re putting a lot of money directly into it, you’re probably influencing the outcome," says Geoffrey Anderson, the president and CEO of Smart Growth America, an advocacy coalition that wants to help communities fight sprawl and save money. "If you don’t believe you’re influencing the outcome, then you have to ask the question: Why are you spending the money?"

Smart Growth America’s report counted 50 federal programs that lean on the real estate scales in some way, whether through tax credits like the home mortgage interest deduction, loan guarantees through the Small Business Administration or Federal Housing Administration, or grants for low-income housing. The report did not count investments by so-called “Government-Sponsored Enterprises” like Fannie Mae and Freddie Mac. It didn’t include non-direct spending on things like transportation or water infrastructure that also has a major impact on real estate. And it didn't include federally owned real estate (of which there is a lot).

In surveying all of these programs across five years, from 2007 through 2011, the report counted a total real estate commitment of $2.23 trillion by the federal government, the largest share through loans and loan guarantees. Not surprisingly, the picture that emerges when all these programs are dumped together into a single document is a chaotic one. Some programs seem to have outlived their original intent, while others are now working at cross purposes with today’s market demand. As a whole, the United States doesn’t appear to have a coherent real estate investment policy, incentivizing second homes for the wealthy on one hand, while underinvesting on the other in multi-family housing, mixed-use development and existing neighborhoods.

"There are so many different ways that we didn’t feel like we had a handle on it," Anderson says. The researchers couldn’t find a single inventory where all of these programs were listed and assessed together as a whole. And so Smart Growth America compiled them, with an eye toward continued debates in Washington over budget cuts and tax reform.

"This is a unique time where everything is on the table," Anderson says. "People are talking about the mortgage interest deduction, people are talking about all kinds of things that were never considered before. That’s what a fiscal crisis will do for you.”

Stepping back and looking at the whole collection, it’s clear that the federal government has favored many types of development at the expense of others, often with weak or outdated logic. The government dramatically favors homeowners over renters. Its support is heavily skewed toward single-family homes over multi-family developments (the FHA, for instance, funneled just one-tenth of its $1.2 trillion in loan guarantees over the past five years toward multi-family housing).


"Federal involvement in real estate," Smart Growth America

Includes homes guaranteed by the FHA and all USDA Rural Housing guarantees. 

The mortgage interest deduction – a program first created in 1913 with the ostensible aim of boosting homeownership – curiously encourages investments in second homes. As we’ve written before at Cities, that massive tax break also primarily benefits upper-income households, despite its billing as a boon for the middle class.

"Federal involvement in real estate," Smart Growth America

The government’s existing real estate programs also create barriers to change in market demand, particularly when it comes to newer mixed-use developments (developers, for instance, seeking an FHA loan for mixed-use properties must limit the share of commercial space to qualify).

Smart Growth America isn’t suggesting that the federal government get out of real estate all together. The criticism isn’t that Uncle Sam intervenes, but that he intervenes ineffectively. "Are we really achieving what we want?" Anderson asks. "And do we even know what we want to achieve?"

As for the second question, the report argues that we should refocus on four goals as we reexamine the federal footprint in real estate: support balanced housing choices (and not just single-family homes in new suburban developments); reinvest in existing neighborhoods; provide a safety net (through housing assistance for the low-income); and help Americans reach the middle class. This last value has long been an implied goal of federal real estate investment, although we appear to have wandered off track.

The report stops short of naming exactly which programs should be axed and which ones expanded or revamped. That conversation will take place over the coming months, Anderson figures. Today’s report is meant more as a conversation-starter, and it’s a sorely needed one among the many Americans (and politicians) who must first acknowledge that the communities we’ve constructed weren’t built on market demand alone.

"My fear is that we would say, 'we can’t continue as we have been, let’s do something different!' and not think a lot about what that means," Anderson says. "If we’re going to be thinking about these things, let's really think about them as a framework that's reflective of our values and goals."

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About the Author

  • Emily Badger is a former staff writer at CityLab. Her work has previously appeared in Pacific StandardGOODThe Christian Science Monitor, and The New York Times. She lives in the Washington, D.C. area.