(ed. note. Please welcome contributor Chris Bradford, author of the economics blog Austin Contrarian.)

As this recent Congressional Budget Office (CBO) report reminds us, the answer is "very regressive."



Even in lean economic times, the average rent in San Francisco (above) is close to $2,000/mo. (Photo: BinBin.net

The

disparity

between the federal government’s support for homeowners and

renters is stark. In fiscal year 2009, according to CBO, Washington

spent almost four times as much money ($230 billion) to support

homeownership as

it did to improve rental affordability ($60 billion).

That

spending on homeowners included $80 billion for the tax deduction for

mortgage interest, $16 billion for the state and local property-tax

deduction

and $16 billion for the capital-gains exclusion.

But it also

included temporary commitments, such as the Obama administration’s mortgage modification program ($75 billion) and the first-time home

buyer tax credit ($14 billion). And let’s not forget the continuing federal outlays to subsidize Fannie Mae and Freddie

Mac’s credit activities ($43 billion).

By

contrast, Washington devoted just $60 billion to improving

rental affordability, mainly through a combination of low-income

housing tax credits, Section 8 rental assistance, and public

housing.

Most

people, I think, will acknowledge a general uneasiness with this

disparity. It seems unfair for the government to spend 80 percent of

its housing budget on the 67 percent of its households who own property.

What’s more, these federal subsidies flow disproportionately to the most affluent of those

households. Homeowners see no benefit from the mortgage interest,

property tax or capital-gains deductions unless they itemize — which

means that many homeowners get little or no actual subsidy. The subsidy

rises with the value of the home and the tax bracket of the buyer.

In

other words, the federal government handsomely rewards

the affluent for buying expensive homes and leaves

renters (as well as low-income home owners) relatively worse off in the process.

But

Washington’s housing subsidies, which have continued under both

Democratic and Republican administrations, have an even more insidious

impact in the nation’s most

expensive markets. There, they make renters worse off in

absolute terms by raising the overall cost of housing.

How does this happen? While federal

homeowner subsidies nominally flow to home buyers, the actual beneficiaries depend on the particular housing market.

In

markets where it is easy to add new housing — those with an elastic

supply — rising

demand spurs more new housing rather than higher prices. Home buyers do

indeed receive the subsidies’ benefits (though they often take an

environmental hit from new, often sprawled construction patterns). The

federal

programs reduce their cost of housing without raising the cost of

housing for renters.

But

the story is different in markets with high demand and tight supply, such as the expensive markets on the coasts — highly

desirable, highly productive metropolitan areas constrained both by

geography and restrictions on new construction. In these markets,

sellers possess a scarce good in high demand and can force buyers to

bid away their federal subsidies. The federal subsidies are bundled

into the sales price; in the end, home buyers are neither better off

nor worse off than without the subsidies.

Renters, however,

are unequivocally worse off.

Inflating the price of

owner-occupied housing squeezes up the price of rentals, too, as

higher home prices force would-be buyers to look elsewhere for

housing. The federal price premium trickles down to all market

segments, causing higher prices across the board.

But unlike buyers, renters do not enjoy large offsetting

subsidies from Washington. They are stuck with higher real prices … until they

decide to flee for a city with cheaper housing. The relative pittance

the government spends on rental housing cannot begin to remedy the

imbalance (and might actually make things worse, to the extent the

government merely creates more demand for housing without stimulating

new supply).

The

federal homeowner subsidies are thus doubly regressive in our most

expensive cities. These cities have the richest residents living in

the priciest homes that command the largest subsidies. And these cities

have the tightest housing markets most vulnerable to distortions in

demand. These places would undoubtedly be expensive to rent

in anyway — I can’t imagine center-city San Francisco being affordable to a

young, working-class household — but are decidedly less egalitarian,

thanks to our federal government’s housing programs.