Externalities from Home Ownership

More thoughts on the home ownership versus renting question:

No time to blog, but hey, it's homeownership!, by Richard Serlin: With regard to Mark Thoma's June 23rd post, "Paul Krugman: Home Not-So-Sweet Home", there's really a lot I'd like to say, but I'll have to restrain myself. ... That said, some quick but I think important things regarding this post:

First, I promote it a lot, but I think my brief working article, "Let's Cut the Ammunition to the Housing Arms Race Permanently", really explains well some of the best things we can do to help homeowners over the long run.

Second, one of the most important things in deciding whether the government should promote something is whether it produces net positive externalities (and how much). I think home ownership does have large net positive externalities, but only for people in certain situations, not for all people in all situations. So government promotion of homeownership could be efficiency and welfare enhancing – if well designed.

Brad DeLong identifies potential positive externalities:

You can make a political-economy argument that local communities work best on a political level when a majority of the voters have a big equity financial stake in the health of the community via homeownership (as opposed to renting), and an economic-myopia argument that encouraging homeownership is one of the few tools we have to push personal savings up toward what they should be. But you have to make those arguments: you can't just assume that widespread homeownership is a very good thing.

Are there others?

What are the negative externalities of home ownership? One was identified in the column, long commute times causing more energy to be used resulting in environmental damage, etc., an argument I didn't fully embrace (I think it's the amenities of the suburbs that are attractive rather than ownership per se, and those amenities cause both renters and owners to locate long distances from their jobs - if ownership is all that matters, buy a condo in the city), but what are the others? (The other two, illiquidity and price risk fall on the individual, but I'm not sure they cause significant costs to parties outside the transaction, i.e. externalities, though certainly things like less effective labor market matching due to illiquidity of houses does impose an aggregate cost, so maybe I need to think that part through a bit more.)

On net, which why do the externalities work? If we were to correct both the positive and negative externalities, would that result in our promoting ownership, discouraging ownership, or remaining fairly neutral? I find it hard to make an argument that negative externalities dominate, and I find myself persuaded by the arguments for positive externalities, but even there I have qualifications.

The questions, I suppose, are (a) is it the equity stake alone that brings about "local communities that work best," or can long-time residents who happen to be renters feel just as invested in the community? If they can and do, then similar externalities exist for (long-time residents who happen to be) renters and there would be no reason to favor owners, policies that give renters a long-run interest in the community would also be desirable (What polices would work for renters? How would you make renters feel more invested in the community, or is it incorrect to assume renters don't care enough, or need to be long-time residents? For those who don't exhibit much investment in the community, would it be any different if they were owners, or is selectivity at work here?); and (b) is home ownership the best mechanism for promoting personal saving? We've observed recently that there is substantial risk to sinking one's life saving into a home, so maybe we want to promote saving in some other fashion, something that is equally available and equally attractive to both owners and renters.

Lots of questions, so interested in your thoughts on this...

Update: More discussion from Arnold Kling.

Comments

[Winslow R.]

"What are the negative externalities of home ownership? One was identified in the column, long commute times causing more energy to be used resulting in environmental damage, etc., an argument I didn't fully embrace "

McCain has an answer that makes the Democrats look incompetent.

McCain proposes $300M prize for new auto battery

John McCain is hoping to solve the country's energy crisis with cold hard cash. The presumed Republican nominee on Monday proposed a $300 million government prize to whoever can develop an automobile battery that far surpasses existing technology.

http://news.yahoo.com/s/ap/20080623/ap_on_el_pr/mccain_energy

I'm in favor of opening up the whole government grant making process to real competition. How about a $300 million prize for an economic model that matches reality?

[lark]

I think the bias towards home ownership is part of the bias towards owners in the "ownership society" and is supportive of the conservative (anti-working families) ideology.

I speak as a former renter, who was evicted several times. Unfair evictions. It spurred us to buy, which was a good decision, but the understanding I got from this of American society is that if you are working to make ends meet you have no housing security. If home ownership becomes less of a goal, then renting must be more secure. There must be more legal protections for tenants, and/or more housing subsidies, more lower cost housing, more lower cost family housing, etc. I'm NOT talking housing projects, controlled by criminals and falling apart. I'm talking about decent places in which to raise a family.

[William Smith]

Prof Thoma,
One negative externality that I think needs discussing, or at least refuting if it is not valid, is that rental communties have an increased density and closer connectivity between neighbors than in sururban life. Collectively, 'you' have a harder time not noticing what's going on when there are more 'you's about. A negative externality, or at least off-set to Prof. DeLong's positive externality, is that home-ownership encourages people to stay in their living rooms more and pay less attention to other conditions.

[odograph]

Winslow, private companies have been spending hundreds of millions on battery technology in the last few years ... will their markets initiatives really fail?

For what it's worth governments, including our own through both the energy department and the defense department are also funneling hundreds of millions of dollars toward battery research. If I recall correctly it's about 200M from the DOD.

For McCains 200M to be "the thing" I think you have to show that it is the marginal contribution that will guarantee success (and that current private/public initiatives will all fail). Can you do that?

[odograph]

oops, wrong story

[spencer]

I'll go back to a very common observation from the 1980s--

The Japanese have beautiful factories and miserable homes.

The American have beautiful homes and miserable factories.

Are we encouraging investment in housing at the expense of investment in business equipment?

If so, is that a desirable policy?

[Jim McCarthy]

1) Flippers do not necessarily care about the community beyond the time period in which they intend to flip.

2) Investors who intend to re-sell in a few years are more cognizant of the impact of changes in the community to the value of their house but still could disagree with the neighbors as to what makes a "better" community. For example, the owner of a one-bedroom house (or condo) may be opposed to needed school improvements desiring to keep property taxes down while the owner of a multiple bedroom house may support upgrading the school district to make his house more attractive to buyers with families.

3) In any case, a commitment to a house as an investment is only tangentially related to a commitment to a community. The additional dimension of the community as your home rather than just a house extends beyond the monetary value of the house as an investment and is as often found among renters as well as owners.

If you want to see a committed community, come to a New York City public hearing - the populace is majority renters and majority committed (perhaps in both senses of the word.)

[ken melvin]

I suspect that the $300 million is off by at least a factor of ten - unless he intends to negate patent rights.

[Fred]

Sorry for reposting, but as I noted in commenting on the other post, home ownership rates are under 40% in Switzerland, and they certainly manage to have social stability and strong democratic traditions.

Also, landlords have just as strong an incentive to be concerned about the community as owner-occupants, even slumlords. Slumlords don't exactly like slums. Slums are high-maintenance and low-rent with low purchase price as the only saving grace. Slumlords simply cope as best they can with slums, and they typically cope a lot better than would owner-occupants.

[Harry Tuttle]

One of the negatives of high home ownership is that it reduces labour mobility.

Renters can move more easily from low-employment to high employment regions.

[odograph]

BTW, I don't think the environmental argument that house buyers "could" just buy condos or co-op apartments for a lower footprint really flies.

If this is about externalities of our current system, then it is about what we are now subsidizing ... in most cases energy inefficient single family dwellings.

[Saving]

"...encouraging homeownership is one of the few tools we have to push personal savings up toward what they should be..."

Savings in this form is not available to be loaned out. Buying a home often consists of borrowing money from foreign savers, and then waiting for the loan to be inflated away. Many loans are never paid off, just periodically refinanced before moving. This is not so much saving as a scheme to slowly appropriate foreign savers' purchasing power over time.

A percentage of people do eventually pay off the loans, and then own the home free and clear. The "savings" is still not available to expand the productive base, but the homeowners can hope to supplement their Social Security checks with a reverse mortgage (borrowed from foreign savers), or selling the home then renting.

[donna]

Jim's got it. If homes are "homes" and not "investments", we don't have a problem.

But then again, if business is a way to make a living, instead of being seen as life itself and therefore worth paying people huge salaries to run, and money is seen as the end itself instead of the means to the ends, we have a lot of problems.

It really isn't just about housing, is it? As long as those who have wealth feel they need to keep extracting more from everyone else instead of actually creating real value, America has a problem. It's just a matter of which bubble we inflate next, instead of actually producing something of real value.

[Jim]

In the world economy, competitive wages will asymptotically converge. The standard of living in the U.S. will likely fall in an absolute sense, even as that of developing countries rise. In the U.S. there will be more renters and fewer home owners, because even as the the price of homes craters the cost of financing and the lack of a down payment will keep most potential buyers out.
For investors, the question is when or if to sell depressed stocks to buy depressed rental properties.

[Michael Perkins]

Two possible negative externalities with homeownership:

1. In my opinion, people tend to think less rationally about their homes in terms of what they are willing to receive as payment to buy their land. This makes it very difficult to assemble large blocks of land for purpose of redevelopment or changing land use. As fuel and housing costs go up, part of the solution will be to repurpose low density development in favor of higher density.

2. When someone either gets another job in the same city or their company chooses to change locations, it's more likely that a renter will decide to move to be closer to the new job or location. With a homeowner, the decision is much harder because the fixed costs of moving are large (about 5% of the home value).

[Happy to rent]

I grew up in a single family home next to a duplex. One of the units was occupied by two nice old ladies, renters, who had lived there for forty plus years. The anti-renter argument is, I think, prejudice pure and simple. I once took in class in land use law. The lawyer who taught it had a maxim that he only somewhat humorously argued was the basis of all zoning regulations. It is "Judges live in Single Family houses". A big downside to homeowners who feel invested in their communities is that collectivity they will work to create a legal framework that excludes other people and uses that they don't like, such as renters.

[Patricia Shannon]

donna, well said

[Mark Thoma]

Hmmm:

To Avoid Student Turnover, Parents Get Help With Rent - NYTimes.com

http://www.nytimes.com/2008/06/24/us/24move.html?hp

[Lord]

If home ownership limits mobility, rent control kills it.

[Sing Expat]

Everyone is confusing borrowing excessive amounts of money to purchase a house you cannot afford to make payment on with "home ownership".

It would be nice if everyone could own a home, a boat, a ski-lodge, a Labrador puppy, and fifty thousand shares of Microsoft. Gee, and a poney please.

[reason]

Mark,
surely this is not the issue, the issue is the net incidence of the subsidies. It doesn't help home owners as it just pushes up land prices (eventually helping land developers and banks). The money could be better used directly improving the communities in which people live.

[reason]

Winslow R.
I'm not convinced such prises (particularly such large ones) are a good idea. I would have to read the small print. But winner-take-all prises encourage secrecy and cheating. I think science proceeds better on the basis of co-operation, and I believe incentives play only a small role. If I thought that it was only an issue of engineering and design I might be more sympathetic.

[reason]

And I second what Ken Melvin says about patent rights. Unless you negate patent rights most of the benefit goes to the winner and it is a just a gift for somebody with deep pockets already.

[reason]

IP is an area that needs more intensive research. There is no doubt it is effective at raising money from private investors, but I am less convinced about the social benefit, in fact I fear it tends to corrupt science.

[ROBERT]

Winslow you are way too stingy. Given the amount of effort that would be needed to make an economic model which matches reality $ 300 million is chump change. Think like curing cancer or maybe flying to Mars. We are waaaay more than $300 million of effort from a realistic economic model. And that is assuming that it is even possible. Now if you offer me $ 300 billion, I might try but if you are only offering $ 300 million I'll stick to fun models which might clarify thought but don't fit reality.

Brad DeLong suggesting opening a debate on possible positive externalities of home ownership. The argument that homeownership causes increased savings which is good because people are myopic really depends on how easy easy financing is. In most countries, the minimum down payments on houses allowed by banks are a significant fraction of the price of the house (50% minimum is not unheard of). In those countries, promotion of home ownership would be promotion of saving.

However, if there are no money down loans available, then encouraging home ownership might shift consumption to consumption of housing services (if people buy bigger houses) and shift national accounts from consumption of durable goods to housing investment, but it could easily reduce the amount of money available for investment in productive capital.

Negative amortization loans and home equity loans have made it possible for people in the US to consume more than they could have consumed if they rented.

It is true that owners make consumption savings decisions facing the HELOC interest rate not the T-bill interest rate (higher rate as they are borrowing not investing). The evidence tends to suggest that interest rates have no noticeable effect on consumption savings decisions in the real world (shocking yes but that's the evidence). Now this is consistent with a substantial effect (for one thing it is basically impossible to isolate the substitution effect (the one that matters for the discussion) from the income effect. However, the effect can't be a game changer . Yes, if true, this would mean that not only supply side economics but also a lot of perfectly respected fresh water economics is hokey. So what else is new.

My honest guess is that the housing interest deduction causes less investment in productive capital than a similarly sized cut in income tax. Eliminating the mortgage interest deduction without any other changes would imply a huge increase in investment in plant and equipment (ignoring the huge recession from a sudden drop in consumption including consumption of housing services).

[Sonia]

Where is the evidence of homeownership externalities? Suppose that stability creates externalities. Then we need to recognize that there are external costs to a dynamic economy. Whether stability should be promoted through home ownership is a seperate matter. Promoting a stable educational environment does not need to mean promoting home ownership. The mortgage interest deduction provides a very small benefit to lower income home owners, $216 for 35-50 year old families with income under $45,000 according to Porterba and Sanai (2008 ASSA). For home owner 35-50 families with incomes $75-$150,000 the value is $1483 and for similarly aged families with income over $250,000, $5,833.

[baileyman]

The biggest externality I can think of is the expansion of the debtor class. Collateral seizure has been for millennia a strong tool for wealth concentration. Something Jews, for instance, in the OT had jubilee every 50 years to prevent.

[mark ii]

You want to cut the ammunition to the housing arms race permanently?

1. Maximum 10 year repayment period for a mortgage.

2. Regulate the percentage of housing stock that can be owned as rental property in each jurisdiction to about <5% of the housing stock (for those of us with an uncontrollable urge to rent).

Point two is important to stop the housing stock being bought up by a class of landlords who could (and in many parts of the world have) bid up the price of homes for owner occupiers. To what extent does the ownership of 20-30% of the housing stock by landlords increase prices through increased demand (I would be interested if anyone knows of any studies of this)?

A positive externality to the above two points (but not necessarily to home ownership) is that decreased housing costs will make labour more competative on international markets. OK, this point is certainly a whole lot more complicated than I am making out and is intimately related to the 'financialisation' of the economy. I don't think I want to go into that here.

The 'renters are more mobile' argument bothers me on a visceral level. I have spent the last five minutes trying to put it into words but the best I can do is to say that I do not want home ownership denied to people so that they are more able to be 'mobile labour units'. This is after all what this argument implies.

[Barry]

Adding on to odograph and others:

When I was at Ford, I was told that the general cost of developing a new engine was ~ $1 billion. That's a new engine of a standard type, not a radically new technology.
Anybody who had a substantially improved and economical battery would be able to make huge sums of money off of it;
a $300 million prize would be a minor piece of change.

Again, McCain is either a fool or a liar.

[Winslow R.]

reason wrote: " I think science proceeds better on the basis of co-operation, and I believe incentives play only a small role. If I thought that it was only an issue of engineering and design I might be more sympathetic."

Perhaps, but grants tend to go to those with connections not to those with drive and ideas. Too many grantees sit on the committees that act as grantors of grants.

This idea of prizes is not new and it has worked. Look at how many people play the lotto and think they can win. The more prizes the better the odds. A whole part of the economy could be set up on 'lotto' idea. Rent this house and 'win' ownership. Clean up the neighbor hood and 'win' $10/hr. Teach economics and 'win' $100/hr. It would not appeal to everyone, but some people like to play the lotto. Perhaps the appeal is the appearance of equal opportunity.

http://en.wikipedia.org/wiki/DARPA_Grand_Challenge

http://en.wikipedia.org/wiki/Ansari_X_Prize

[Holly W.]

I was struck by this comment from Brad DeLong: ...encouraging homeownership is one of the few tools we have to push personal savings up toward what they should be.

Most of the tax incentives around home ownership are built on this idea, that paying down a mortgage on a house which is increasing in value is a form of forced savings that is virtually inaccessible until the house is sold, and people should get some reward for that effort and sacrifice.

The problem is, the easy availability of home equity loans has changed all that. I've been amazed by how many people mentioned in articles about foreclosures were not johnny-come-latelys into the housing market, but had actually bought comparatively inexpensive houses 10-15 years ago, then took out home equity loans based on the current value of their houses and found themselves over their heads in debt.

We seem to have become confused about exactly what a house is supposed to represent. Is it "savings," which implies slow, steady appreciation and hard work but fairly low risk; an "investment," which implies faster appreciation, less work, but greater risk; or just a way to maintain perpetual debt?

[Winslow R.]

Holly wrote: "The problem is, the easy availability of home equity loans has changed all that."

A problem for some but an opportunity for others.

[c roast III]

Local taxation policies contribute to negative externalities associated with sprawl.
Typically, empty lots in cities (like parking lots) and open land on suburban fringes are taxed at a lower rate than structures - check your tax bill. It’s cheap for developers to bulldoze "greenfields" for housing developments where each house will have the appropriate 3-car garage and occupants will have to drive to the required new/school/park/library/shopping center/work place/bathroom etc.
There is no incentive to add a mother-in-laws apartment to your house, because you will be taxed at high rate. There is no incentive to turn the downtown parking lot into an apartment house/condo because the taxes are cheap and the income from parking adequate.
Using the old Henry George theory of "land value taxation" turns these incentives on their heads. High taxes on the parking lot in the CBD impel the owner to do something actually productive with it, and it will be taxed at a proportionately lower rate after development. Those who own open land on the urban fringe can be compensated through land Land Banking and other extra-taxing methods that will give them some adequate compensation, but not drive them to sell to developers.
Rational land taxation – positive development incentives – minimal externalities.
Bah-da-bing!

says...

Winslow R. said

"McCain has an answer that makes the Democrats look incompetent. McCain proposes $300M prize for new auto battery"

Except that McCain is proposing a prize for a breakthrough that has already occurred and is on the path toward being commercial available. See the nanowire battery developed at Stanford.

[Patricia Shannon]

Property is often taxed at a rate based on it's highest possible monetary value, causing wooded land to be developed, because the owners can't afford the taxes.

[piglet]

DeLong: "You can make a political-economy argument that local communities work best on a political level when a majority of the voters have a big equity financial stake in the health of the community via homeownership (as opposed to renting)"

Maybe you can make that argument, but I have never seen it made. I think it is wrong, it is not supported by any empirical evidence, it is not supported by Common Sense, it is arbitraty, and ultimately based on class resentment. Everybody has a stake in the health of the community, and most certainly in the Common Good. To claim that you need to be wealthy to care is both arrogant and ignorant. Moreover, those who have the biggest financial stakes are rarely the ones with the biggest concern for the Common Good. (The opposite isn't true either.) That the "home owners are better citizens" propaganda is being taken seriously says a lot about what is wrong with this country.

[Patricia Shannon]

mark ii says...

You want to cut the ammunition to the housing arms race permanently?

1. Maximum 10 year repayment period for a mortgage.

2. Regulate the percentage of housing stock that can be owned as rental property in each jurisdiction to about
At least one of us is missing a point here.
It seems to me that these two points together would result in a lot of people being homeless or living with relatives or friends.

some results of googling for "tent city", which reference current tent cities for homeless people:

Reno, Nevada
Lynwood, WA
Seattle-King County, WA
St. Petersburg, FL
Sacramento, CA
Spokane
Ontario, California

[reason]

Patricia Shannon
Property is often taxed at a rate based on it's highest possible monetary value, causing wooded land to be developed, because the owners can't afford the taxes.
I wonder why you think that is wrong. To put my Georgian hat on - most of the value comes from externalities (infrastructure if you like) so to keep valuable land underutilitized wasting the infrastructure to which it has access is a cost to the community. Why shouldn't this luxury be taxed? If you want to have some wooded landed why not buy it somewhere else where the land is less valuable? Efficiency is not just in production, but also in consumption (one of my recurring themes).

[Patricia Shannon]

reason

I guess it's a matter of values. I like to be around natural spaces. There is evidence it is good for our species, in general. I like to breathe clean air. I think it's immoral to destroy all the habitat in an area that is needed by other species. For some reason, I don't think that money and profit is the only things of value.

[piglet]

reason: what about farmland near developed areas that the owners can't afford to farm any more because the speculation value of that land is so high, resulting in more suburbanization and bulldozing of greenfields, as your Georgian colleague above said (emplying some logic that I am unable to follow)? Your efficiency argument works only when planning is sufficiently regulated to prevent profit-driven development from taking everything over. That undeveloped, "underutilized" wooded area, for example, may later become a valuable city park, but not if the owners are forced into building condos.

[Patricia Shannon]

The Soul of the Earth
copyright Patricia M. Shannon 2000

When I go up to the woods
all my troubles seem to fade out of sight,
all my worries seem to roll off my back,
and I'm one with the world.

When I walk in the woods,
oh, what wonders I do behold,
as the cycle of life now unfolds
before my wondering eyes.

When I'm filled up with darkness
and I'm deep in despair,
I go up to the woods
where my soul I repair.

And the peace of the woods
soothes my soul when I am hounded by machines,
and the sweet-smelling soft earth
soothes my feet when they are pounded by concrete.

The trees provide a shelter
from the scorching summer sun;
a home for frogs and porcupines
where sparkling streams do run.

We must protect our forests
so our children still will know
the joy and peace that can be found
in a woodland grove.

But the peace of the woods
is now shattered by the sounds of machines,
as the sweet-smelling, soft earth
is now covered by a sea of hard concrete.

The living trees are cut down,
and replaced by sawed-up boards;
The birds and squirrels have lost their nests,
and the bobcat is no more.

And they say that it is progress,
but will you tell me, please,
where will we go to ease our souls,
when they've cut down all the trees.

[Patricia Shannon]

Some talk of carbon sequestration. It already exists. It's called "trees".