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March 19, 2008

« Courage, Honesty, Character | Main | Splitsville »

New Yorker economics writer James Surowiecki:

Americans may disagree about nearly everything, but few contest the idea that owning your home is a good thing. ...

To recover from recession, economies need prices to fall until they reflect genuine supply and demand. With certain kinds of assets, like stocks, these adjustments take place quickly, sometimes viciously so. Buying and selling houses, though, is a far slower process. The good thing about this is that housing prices never suffer crashes on the scale that you sometimes see in the stock market. The bad thing is that it can take a long time for housing prices to reflect reality. Homeowners, as economists have shown, tend to remain unreasonably optimistic about the value of their homes, and they hate to drop their asking price. As a result, existing-home sales in the U.S. are now at a nine-year low.

Homeownership also impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. As a result, they often stay in towns even after the jobs leave.  And reluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow.

This doesn’t mean that the U.S. should become a nation of renters—even if both New York City and Switzerland show that high rates of renting are compatible with great prosperity. With the bursting of the housing bubble, though, it’s time not just to scrutinize the excesses of our home-buying process but to recognize the risks and costs inherent in owning a home. Sometimes the price—for the home buyer and for the economy as a whole—is too high to pay.

Housing tenure is not a given. It is associated with particular modes of production. Homeownership was a critical cog in the fordist economy - stimulating purchases of everything from cars and washing machines, spurring the large-scale development of infrastructure. But it is a significant institutional impediment to the flexibility, adjustment and mobility the creative economy requires. NYC and London will derive even greater benefits over time from high rates of renters.  My hunch, which I outline in Who's Your City and Atlantic writer Matt YgIesias picks up on, is that sooner or later housing tenure types will adjust.

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Comments

MPS

Richard - there is much truth in what you say about the "stickiness" of homeownership negatively affecting economic flexibility and adjustment. However, I think the idea of high economic mobility facilitated by more renting and less home-owning is much more appealing to those without children OR immigrants crossing international borders. See the first comment in Matt Yglesias' post.

I have a two-year-old son, live in a nice house in a nice neighborhood, with a wife who is happy at her job. While I occasionally have flashes of wanderlust, I must temper that as a father and husband to make sure I prudently look out what's best for my family. The good news is that I live in a moderately-growing southern state capital/university town that has a stable (if not spectacular) economy. Housing is so affordable here (especially after moving from DC) that home-ownership was still a net plus over renting. My wife and I work in the public sector, so we make good salaries if not superstar ones. While there are some good opportunities for me out there, from Atlanta to Abu Dhabi, I would not consider moving for the next, say 3-5 years. With young children, at least for us, stability trumps mobility at this point.

I do think it's probably a good idea to think of a home, whether bought or rented, as a bit more of a consumptive good than an investment, although I do hope homeowners can at least count on steady growth in value over the long term. Moreover, analyses have been done that, on average, once you account for inflation, closing costs, maintenance, upgrades, etc., even over the long haul you pretty much break even.

DC

Richard, In Who's Your City you suggest that maybe it is time for an alternative, something between traditional ownership and renting. Perhaps the alternative is investment in a pool of properties, sort of a mutual fund for property ownership, where investors buy a piece of the property pool. For their money they get a roof over there head now, but they are not tied to that piece of property when their job moves. The investor also gets the traditional homeowner benefit of investing their housing expense rather than just purchasing temporary shelter. The costs, risks, returns, etc., could possibly be spread across the pool of investors, possibly allowing for some cost savings in more expensive markets. Just a thought.

Jon

There seem to me to be several interlinked issues that need understanding and addressing in the housing market:

1. Aspirations -- it doesn't always matter what makes *sense*, but what people want matters. There may be a slow apirational shift taking place in developed economies among younger workers, but it isn't hard to scratch the surface and find a lot of people whose aspiration is a detached house with a backyard. Even if the house is only separated by 1.5 feet from its neighbours and the yard is too small to swing a cat in. I'm always amazed that the communal garden approach hasn't taken off -- I'd much rather have part-ownership of a 300m^2 garden than full ownership of a 10m^2 one, but there are surprisingly few people who seem to share that willingness to share 'their' space.

2. Mismatch between lifestage and housing provision -- having spent my 'adult' life so far in cities such as T.O., NYC and London, I'm now nearing my mid-30s and am finally seriously considering children. But how do I do this in a city where I can barely afford a 1-bedroom flat, let alone the 2- or 3-bedroom one necessary for a family? London is now so expensive that I may be *forced* to move to the suburbs even though I'd love to continue living near or even in the centre. And I'm guessing that I'll need to look in some pretty dire suburbs in order to find something I can afford to buy (because almost no one rents out suburban housing). The majority of new build or refurb housing in downtown areas is designed either for people earning 6-figures or for young singles and takes no account of lifestage.

3. Demographics -- separately from lifestage issues, developed country demographic trends also suggest increasing housing pressure. Many professionals (especially in areas such as banking or finance) may maintain separate apartments well into marriage/partnership and even into child-rearing. Moreover, rising numbers of divorced parents and separated couples mean that the overall number of households is growing much, much more quickly than new-build housing is coming on-stream. NIMBYism over new developments or increased densities only makes this worse.

Tenure type is only one dimension amongst several in the housing market, and I am not optimistic.

Zoe B

The matter of commitment to living in a given community might not matter that much in high-income neighborhoods. People pay for the services they want (either privately or through taxes), and have a lot to lose from social disorder. In low-income neighborhoods commitment to the community could matter a good bit more. First, if you cannot pay for a service you might be able to barter for it if you know your neighbors - but how long do you need to live in a place before you know which neighbors to trust? I have heard the 1960s riots attributed (in part) to the side effects of urban renewal - when large numbers of people were displaced, they lost their informal support systems and thus had much more stressful lives. Second, if you don't have much, you don't have as much to lose as would a wealthier person. If you don't plan to stay in the community, you have less incentive to be a good neighbor. Combine those, and you have fewer curbs on inconsiderate or destructive behavior. You might have lots of 'eyes on the street', but public safety benefits only if observers care enough to act against unsafe behavior.

I live in a town with TONS of rental properties, populated by students who move every year. These folks come mostly from middle-class homes and have grown up in healthy communities. They do know how to behave in a socially responsible manner. Student-dominated neighborhoods have problems with public drunken behavior, including property damage and criminal acts (fights, rape, drunk driving, occasionally manslaughter or 2nd-degree murder). Students don't generate enough taxes to pay for the public services they require. This occurs in part because rental units provide fewer taxes than do (otherwise identical) owner-occupied units, and in part because students have less income than people who own their homes. My town is working hard to increase owner occupancy in close-to-campus neighborhoods, so that the community can subsidize the cost of hosting so many low-income, temporary residents. The alternative is civic bankruptcy and social disorder that drives away people who have a choice about where to live.


Frank

There is another creative-class supporting home ownership model out there, and it exists in your old stomping grounds--Pittsburgh.

Given Pittsburgh's extremely affordable housing prices, there are several areas in town where a significant number of creative classers are putting down roots and buying property, specifically Deutschtown and Lawrenceville. How this will develop long-term is anyone's guess, but home-ownership can actually be a draw for some creative-classers to move into places with less-than-stellar economies, because, when it comes down to it, renting really isn't all that great.

Matt

Zoe, it seems dangerous to generalize to make generalizations about rentals based on student housing areas. I think that's a specific subset of the problem (though certainly an important one).

Actually, it's probably hard to make generalizations at all. In a "good" rental area, people often don't realize how many residents are renting. Richard's own neighbourhood (Rosedale-Moore Park) is a perfect example: in spite of its high-end reputation and median family income of $161K, 47% of households are rented. Poverty, not residential tenure, seems like a greater influence on the social aspects of a neighbourhood.

Interestingly, in Toronto (and perhaps other Canadian cities), multi-unit rental properties pay roughly double the property tax of an equivalent group of individually owned units, though this is slowly being equalized.

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