Brad Meyer is running for congress in Indiana's 9th district. He posted a voter guide on a local subreddit. It included two housing policy related highlights:

1. Increase supply by limiting large-scale corporate ownership of single-family homes.
2. Lower interest rates, and providing first-time buyer incentives.

This is slopulism. I called this out and Brad was actually nice enough to reply with a lengthy email! You can view the entire thing here: https://imgur.com/a/CHiHu2t.

The email will be the subject of the R1.

The model

In this first part of the email he tries to argue that house price to income ratios decrease in response to interest rate hikes. There is quite a lot to unpack here.

First of all, what is this model? "SupplyElasticity_i"?? that is quite the control variable! That can mean a lot things! How is the housing supply elasticity calculated here? That's not a straightforward thing to estimate. Without specifying this I am just looking at an incomplete description of the model.

And the chart... Taking the chart labels at face value they cannot possibly match the model! You can't represent the model in two dimensions like that. Even you interpret this charitably and say the y-axis is actually "Residual PIR after controlling for everything except interest rates" the estimated line still does not match the model because its clearly nonlinear! Idk what I'm even looking at here. What was the point of including the model if your actual estimation seems to ignore it entirely?

Actual big picture problem

Listen none of the above actually matters because the point he's trying to make is something I ultimately don't disagree with: he's trying to say that price to income ratios arent actually important for housing affordability, its mortgage payments that matter. I agree! That would give you a cleaner estimate of the cost of housing as opposed the price of houses. The housing crisis in this country is a problem of high housing rents, whether they be explicit or imputed rents.

None of that actually addresses my original complaint though: if you subsidize housing interest payments through the usual policies like the mortgage interest tax deduction, you will increase housing prices. This is just a simple econ 101 argument: if you subsidize demand you will increase prices and you won't actually address the underlying problem. We need to build more housing.

There is overwhelming evidence I could point at here, but the best paper is the canonical Glaeser and Shapiro 2002 paper that address whether the federal mortgage interest deduction meaningfully increases home ownership, which is Brad Meyer's stated goal:

> The home mortgage interest deduction creates incentives to buy more housing and to become a homeowner, and the case for the deduction rests on social benefits from housing consumption and homeownership. There is little evidence suggesting large externalities from the level of housing consumption, but there appear to be externalities from homeownership. Externalities from living around homeowners are far too small to justify the deduction. Externalities from homeownership are larger, but the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.

You can look at the paper itself for more a careful discussion of the empirical strategy. A more recent paper by Hilber and Turner corroborate this finding with even more damning evidence that zoning reform is critical:

>This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting variation in the subsidy arising from changes in the MID within and across states over time. We test whether capitalization of theMID into house prices offsets the positive effect on homeownership. We find that the MID boosts homeownership attainment only of higher-income households in less tightly regulated housing markets. In more restrictive places, an adverse effectexists. The MID is an ineffective policy to promote homeownership and improve social welfare.

> ...

> Using a measure of restrictions on new housing developed for 83 metropolitan areas in the United States (Saks, 2008), we investigate how local housing market conditions and income status affect the way the MID influences household homeownership decisions. Our priors are that the impact of the MID may be positive or negative, depending on market conditions. The MID reduces the after-tax cost of homeownership for a given price of a home. However, by increasing house prices, the MID raises costs for down-payment-constrained households. For all households, it also increases the opportunity cost of homeownership and the transaction costs of purchasing a home. Our empirical analysis suggests that the MID has no discernible impact on the level of U.S. homeownership. However, the MID has a perverse effect in highly regulated housing markets. Because the supply of housing in such areas is inelastic, much of the MID is capitalized into housing prices rather than boosting homeownership attainment. At these higher housing prices, certain types of households (e.g., down-payment-constrained households) opt out of the market for owner-occupied housing. At the same time, full capitalization of the subsidy and continued utilization of the housing stock can occur if the remaining market segment increases housing consumption in response to the subsidy. Only in markets with lax land-use regulation does the MID have a positive impact on homeownership attainment, and even then, the effect appears only for higher-income households. Our cost simulations suggest that the subsidy cost per converted homeowner amounts to a staggering $28,397 per new homeowner per year.

So in summary:

1. Subsidizing demand will increase housing costs. You can measure this in rent or prices or whatever you want.
2. Subsidizing demand is an incredibly ineffective way to boost home ownership rates.
3. Subsidizing demand through policies like mortgage interest deduction will mostly benefit the wealthy.
4. You're not gonna solve the housing crisis without land use reform. The solution is building more housing, not subsidizing demand.

Edit: Listen Brad, I'm still probably voting for you but there are things you can do at the federal level that will actually go a long way to solving the underlying problems with our housing market. I strongly encourage you to read this paper by Glaeser and Gyourko on reforming the MID to make it conditional on living in a county with an elastic housing supply:

>Reforming the home mortgage interest deduction to provide incentives that will induce overly restrictive regions to permit more housing. In counties in which the total number of annual housing permits is less than 1 percent of the total housing stock, the cap for mortgage deductions should gradually be lowered from $1 million to $300,000. The money raised by the increase in federal revenues should be given back to the counties to subsidize new housing construction.

The reason this policy works is because it will target people who are more likely to oppose new housing construction. If you want them to buy into more housing then make it make economic sense for them to do so.