By: Patrick Barta, Gregory Zuckerman

January 29, 2001, The Houston Chronicle

NEW YORK - The number of American families owning a home hit 71.6 million last year, a record that amounted to nearly 68 percent of households.

Housing advocates, big lenders, Washington politicians and the two massive mortgage purchasers - Fannie Mae and Freddie Mac - want to push those already sky-high numbers even higher. Fannie Mae is predicting the rate will hit 70 percent within the decade.

But is America becoming too fixated on homeownership?

There's little doubt homeownership has produced tremendous social and economic benefits. Homes are often a major source of wealth creation for individual owners, and homeownership helps stabilize communities; studies have shown that homeowners are more likely to vote and get involved in parent-teacher associations.

Also, it's widely recognized that "the housing-finance system in the United States is the best in the world," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. "In most countries of the world, you have to be in the upper reaches (of society) to get a home," says Frank Nothaft, deputy chief economist at Freddie Mac.

Few economists suggest the United States should stop supporting or subsidizing the housing industry. Still, some are starting to wonder whether the United States should continue to divert ever-growing amounts of capital into boosting homeownership beyond its current level, at the expense of other worthy needs. "We're over-investing in housing relative to other things," says Edwin Mills, an emeritus professor at Northwestern University's Kellogg Graduate School of Management.

The United States government supports housing in several ways. The first is through the wildly popular deduction given to taxpayers on interest paid on mortgage loans, which saves homeowners an estimated $ 55 billion a year. More controversial is the government's sponsorship of Fannie Mae and Freddie Mac, which buy loans from lenders to improve liquidity in the housing market. That sponsorship allows the two companies to borrow more cheaply than other concerns do, resulting in lower mortgage rates for home-buyers.

The problem, Mills and others say, is one of supply and demand for capital. Direct or indirect subsidies earmarked for housing probably make it more expensive for the broad swath of companies to borrow to pay for everything from manufacturing plants to more computer equipment, which can in turn enhance productivity and boost employment.

Meanwhile, many economists believe there's a natural ceiling to the national homeownership rate, beyond which there may be little benefit in subsidizing so many home purchases. Many people would rather rent, while others don't have the financial wherewithal to handle a mortgage and the upkeep of a house. Others might be better off putting their down payment in the bank or into investments.

No one knows what the ceiling is, "but I fear we're getting perilously close," says Karl "Chip" Case, professor of economics at Wellesley College in Wellesley, Mass.

Case believes that lower-income people would benefit more from increased subsidies toward renting; at the current high level of homeownership, he worries, the existing subsidies could be encouraging people with bad credit to buy homes, upping the likelihood they will only end up in default in a recession.

Much of the growth in mortgage debt outstanding in recent years reflects new programs aimed at boosting homeownership through incentives like lower down payments.

When Fannie Mae and Freddie Mac were created decades ago, far fewer Americans owned homes, and funding for long-term mortgages was harder to come by. Now, many of the beneficiaries of housing subsidies are relatively wealthy and can easily pay a slightly higher interest rate on their mortgage; Fannie Mae and Freddie Mac, for example, are allowed to buy mortgages worth as much as $ 275,000.

"Excessive investment in housing is centered in upper-and middle-class people, who get the most benefit from the tax breaks and likely buy more housing than they otherwise need, such as second homes and bigger homes," says Eugene Steuerle, senior fellow at the Urban Institute in Washington.

Altering the current structure of the subsidies, though, would be difficult. It's not as if others don't enjoy subsidies of their own, including banks, which enjoy the benefits of federally insured deposits. And though they have been criticized for not doing enough to help low-income and minority borrowers, Fannie Mae and Freddie Mac are trying to boost participation in those areas. Last year, Fannie Mae launched a program aimed at purchasing $ 2 trillion of mortgages for minorities, young families, woman-headed households and others.

So long as those groups are underserved, Fannie Mae says, debates about the allocation of capital for housing are misguided. "There may well be a maximum point of homeownership for white middle-class Americans in their 40s," says John Buckley, a spokesman for Fannie Mae. "But the fact that about 75 percent of whites own their own homes but only about 45 percent of blacks and Hispanics own shows that there's still work to be done."