Should Policy Tilt So Far in Favor of Homeownership?

In the United States, the idea that homeownership is better than renting is a political article of faith. But is it?

In his July 13, 2013 New York Times op-ed “Owning a Home Isn’t Always a Virtue,” Bob Shiller makes the case that renting has advantages, too. Adding bullet points added to separate ideas, he writes:

  • … renters are more mobile. That means they are more likely to accept jobs in another city, or even on the other side of a large metropolis.

  • In addition, it’s hardly wise to put all of one’s life savings into a single, highly leveraged investment in a home — as millions of underwater borrowers today can attest.

To see that more renting and less homeownership doesn’t cause anything terrible to happen, Bob Shiller points to Switzerland:

Consider Switzerland, which by several accounts has had one of the lowest rates of homeownership in the developed world. In 2010, only 36.8 percent of Swiss homes housed an owner-occupant; in the United States that same year, the rate was 66.5 percent.

Why the difference? Switzerland doesn’t favor homeownership in the tax law as the US and many other countries do. And it has laws that help make renting smoother.

There are several points on the side of homeownership (in my words):

  • Homeowndership seems to serve as a commitment device for saving.

  • Homeownership makes it easy for people to radically customize their home to their own preferences.

  • Homeownership avoids moral hazard problems of occupants not taking care of a rental unit very well.

But a big part of the political sentiment in favor of homeownership is, as Bob Shiller writes, that “Homeownership was thought to encourage planning, discipline, permanency and community spirit.” Let me parse this:

  • Planning: The idea seems to be that homeownership lengthens people’s planning horizons—presumably because they can predict their personal future better.

  • Discipline: Having to meet a mortgage or face a large transactions cost to move to another house is thought to be good for the soul.

  • Permanency: People may like having the same neighbors for a long time. Playing a repeated game with neighbors leads to more neighborliness.

  • Community Spirit: Homeowners gain from making the community more pleasant to live in—whether they stay to enjoy that pleasantness themselves, or get a better price from the next owner who wants that pleasantness.

To counterpose to these arguments for the virtues of homeownership is a huge political economy minus: homeowners have an incentive to vote for local government policies that restrict construction as collusion to keep the prices of houses up. This deprives people who would very much like to live in the community, but can’t afford much from being able to live there. Sometimes there is a token amount of subsidized housing, but it takes a lot of units to house a lot of people if a lot of people want to live in a desirable city. If there isn’t a lot of construction, many people lose out.

I address the political economy problems from homeownership in “A Political Economy Externality that Should Be Taught in Every ‘Principals of Economics’ Course.” If this giant political economy problem from homeownership is addressed—by say state mandated construction targets with a state agency allowed to approve construction if a city doesn’t meet its target—then homeownership is a much better thing than homeownership is as the situation stands.

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