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Monday, June 23, 2008

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.

    Posted by on Monday, June 23, 2008 at 01:44 PM in Economics, Housing, Market Failure | Permalink  TrackBack (0)  Comments (42)


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