Calculated Risk points out Robert Shiller’s article in the New York Times on the subsidization of homeownership in America. Shiller asks why we should subsidize homeownership, beyond short-term expediencies such as the fact that since we have a lot of unemployed construction workers, we could reduce unemployment by subsidizing homeownership (as long as we can subsidize new home construction as opposed to just trading houses). Of course, the reason we have a lot of unemployed construction workers is that we over-subsidized housing for the past decade and a half; hence Shiller’s question.
At first, Shiller seems to give this answer:
“While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. . . .
“The best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. . . .
“In his classic 1985 book, ‘Crabgrass Frontier,’ Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.”
At this point, I was ready to pounce. Shiller seems to be arguing that we should subsidize homeownership because we share a belief that homeownership is good. But he doesn’t fall for the trap he seems to be stumbling into. Instead, he says,
“If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.
“But first, we should rethink the idea of renting, which could be a viable option for many more Americans and needn’t endanger the traditional values of individual liberty and good citizenship.”
I’m a little leery of “creative finance,” but I’m all for rethinking renting. The key point, which Shiller makes, is one that I’ve made to many of my friends thinking of buying houses: buying a house is colossally stupid investment according to the investing textbook, because you are taking on a high degree of leverage and putting more than your net worth not only into a single asset class, but into a single structure on a single piece of land. What makes it sensible, sometimes, are the mortgage interest tax deduction (an extremely regressive subsidy) and the fact that in many places you may want to live there are few viable rental alternatives, so you have to buy. (That is basically the situation my family was in when we moved to Western Massachusetts nine years ago; our dog eliminated most of the rental options.)
Calculated Risk sums it up this way:
“There are probably advantages to society of a fairly high homeownership rate (as opposed to tax advantages to the individual) – perhaps homeownership creates a stronger bond to the community (more community involvement, awareness of crime, and more), and homeowners tend to keep up their properties (unless they have negative equity!). Shiller argues for other psychological benefits that are harder to quantify.
“There are negatives too; as an example, homeownership reduces geographic mobility, especially right now, and that makes it harder for some homeowners to move for employment reasons.
“And of course withdrawing all of the subsidies for housing would lead to plummeting house prices. So any unwinding of the housing subsidies, like government subsidized mortgage rates, would probably have to be reduced gradually.”
And here’s a short excerpt from 13 Bankers (from the draft manuscript, final version may differ):
“The ideology of homeownership has its roots in two sources. The first is the idea that homeownership is intrinsically good–it encourages individual responsibility, provides financial security, promotes community attachment, encourages people to take care of property, and so on. . . . There may also be an element of truth to this idea; homeownership is generally thought to create positive externalities, since homeowners are on average more likely to devote effort to improving their communities. After reviewing other empirical studies and doing their own analyses, Edward Glaeser and Jesse Shapiro conclude:
[T]here is a limited body of evidence suggesting that homeownership creates positive spillovers for near neighbors. Homeowners do appear to be more active citizens. They vote more. They take better care of their homes. Houses that are surrounded by homeowners are worth a little more than houses that are surrounded by renters.
However, much of the positive effect of homeownership is due not to ownership itself, but to other factors that differentiate owners and renters. In another paper, Glaeser and Denise DiPasquale found that ‘almost one-half of the effect of homeownership disappeared when we controlled for the time that the person had lived in the home.’ William Rohe and Michael Stegman compared a sample of low-income homebuyers with similar low-income renters over time and found that the homebuyers were less likely to engage in informal neighboring, more likely to participate in block associations, and no more likely to participate in other types of community associations. Alyssa Katz concludes, in Our Lot, ‘scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one’s home, homeowners and tenants really aren’t that different.’
Before we rush back into subsidizing homeownership, we should figure how how valuable it really is to society as a whole.