Is real estate truly a free market? According to a new study from Smarter Growth America, it could not be further from a free market.

By Peter Ricci

Real estate is often considered the last truly “free” market in the U.S. economy, a sector that, unlike agriculture, manufacturing, education or health care, has avoided the influence of government to grow and prosper – or has it?

According to a new report by Smart Growth America, nothing could be further from the truth. The real estate market, it reports, is far from a free market, with both direct and indirect government involvement – to the tune of $450 billion each year – shaping how real estate develops and what kinds of products it offers.

Smarter Growth America – U.S. Government Invests Heavily in Real Estate

For its report, Smarter Growth America studied the federal budgets from 2007 to 2011, with particular focus on more than 50 federal programs currently investing in the U.S. real estate sector. In addition to the aforementioned $450 billion yearly investment, here are some of the other details that Smarter Growth America uncovered:

• Between 2007 and 2011, the federal government committed a total of $2.23 trillion to the real estate markets through its major programs.
• That $2.23 trillion broke down as follows: $1.363 trillion went to loans and loan guarantees; $680 billion to tax expenditures; and $187 billion to direct grants and credit subsidies.
• More specifically, the government’s $1.363 in loans and loan guarantees mainly goes towards the FHA’s single-family and multifamily loan programs, which totaled a whopping $1.216 trillion from 2007 to 2011; other loans and guarantees went to the Department of Agricultures lending programs ($80 billion) and the Small Business Administration’s commercial loan program ($61 billion).
• Regarding tax expenditures, it will hardly surprise agents that the mortgage interest tax deduction (MID) was the biggest expenditure, with $396 billion going towards the deduction; also, $106 billion went to state and local property tax deductions, and $94 billion to capital gains exclusions.
• Finally, the Department of Housing and Urban Development mainly takes up the “direct grants and credit subsidies” section, with $184 billion going to the agency.
• Surprisingly, even with all the funds that Smarter Growth America included in its analysis, two conspicuous players in the housing market were left out: Fannie Mae and Freddie Mac; were they to be included, Smarter Growth America wrote in its report, we’d need to add the $5.5 trillion in loans and guarantees the GSEs handle.

Is the Government Supporting Housing Wisely?

The conclusions Smarter Growth America makes from its report are wide-ranging, and would no doubt result in a dramatic recalibration of how the federal government allocates is considerable resources for the housing market.

The government, Smarter Growth America concludes, should refocus is real estate investments. Currently, the government’s spending not only prioritizes single-family homeownership over renting, but it also does not invest enough in existing communities; and furthermore, of the homeowners that receive federal aid (namely through the MID), wealthier households receive a disproportionate share of the benefits.

Christi Borden, an agent with Better Homes and Gardens Real Estate Gary Greene in Katy and board member for HAR and TAR, said that if the government were to reconsider its support for housing, it should not make any changes to how the MID works.

“The mortgage interest deduction is still very important, and a big advantage to being a homeowner,” Borden said. “I wouldn’t want to touch that.”

Additionally, Borden added that the housing market influences a wide array of other industries, from construction, to manufacturing, to financing, so it may not be wise for the government to make any cuts in its housing-related funding.

“I just don’t know if housing is where they should be cutting,” she said. “There’s so many areas that are not as important to the economy as housing.”