Robert Shiller: Mom, Apple Pie and Mortgages

Robert Shiller says financial engineering can "lead us to a different kind of housing, yet preserve our core values":

Mom, Apple Pie and Mortgages, by Robert Shiller, Commentary, NY Times: For decades, the federal government has subsidized ... owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration ... issuing guarantees ... on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? ...

This time, 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. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

In ... 1985..., Kenneth T. Jackson of Columbia University delineated the complex train of thought that ... has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring. ...

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today. A cardinal tenet is that people should diversify — meaning they shouldn’t put nearly all of their financial eggs in one basket, which is what homeownership now means for so many people.

American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky... Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. ...

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... Switzerland, for example, is a country with strong patriotism... Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States... Swiss national identity doesn’t depend on homeownership. ... But America isn’t Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs...

A stock of apartment buildings in central cities, of course, makes rental management much easier. This is true in Switzerland, as well as in American cities like New York, which aren’t typical of the rest of the United States. We need to consider a gradual transition toward new kinds of housing finance institutions — entities that may lead us to a different kind of housing, yet preserve our core values. Although such innovation isn’t likely to end subsidies, it should refocus them on enhancing the qualities of life that we really value.

We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.