Friday, June 3, 2016

Housing: Part 156 - Credit Access and Economic Inequality

We have learned all the wrong lessons from the 2000s housing crisis.

Here is a graph of implied net returns to homeownership before taxes and capital appreciation, for Dallas.  In Dallas, property tax and capital appreciation over the long term probably roughly cancel each other out.  Much of the reason for lower returns on high priced homes is because tax benefits are more universally captured among those homes - our broadly efficient housing markets reflect the highly regressive tax treatment of housing income in the relative prices of different homes. 2016
Median Price and Rent, by zip code
At the low end of the range in Dallas, return on investment on an unleveraged home appears to be more than 10%.  That means that, even a leveraged purchase with a high interest rate mortgage would be reasonable - especially if that mortgage might be refinanced to a lower rate after a few years of capital appreciation.

I presume that part of the reason for the high return is that the management costs to landlords in low-end neighborhoods tend to be higher.  One of the costs of tenant-occupied real estate is the risk of bad tenants to the landlord.  This may be the most valuable benefit of homeownership - the value of control...the value of knowing the tenant and the landlord have incentives that are aligned.  And, they really can't be more aligned than if the tenant and landlord are the same person.

There is a discontinuity here.  In a negative equity environment, the de facto owner is the bank, and everyone is familiar with stories of the condition homes were sometimes left in by foreclosed families.  So, there is certainly a risk to ownership that utilizes low down payments.

There is a presumption that low down payments were the reason for much of the supposedly overpriced housing stock in the 2000s.  Adding this presumption to the problem of underwater owners, we conclude that low down payment programs aimed at owner-occupiers are a big problem, and the lesson we take away from the period is that we should get rid of those programs. 2016
But, in much of the country home prices were rising at 5-10% during mid 2000s - hardly out of the ordinary, and giving little reason to blame any factor for excessive prices.  In the worst cities - the Closed Access cities - existing home sales and price appreciation peaked in late 2004.  The boom in private pool mortgages happened from 2004-early 2007.  The Contagion cities did see very high appreciation through 2005.  But, much of the activity in those cities was among landlords and investors.  Maybe there is something to be said for limiting the low down payment activity in that market, but if we do regard that problem, we should be careful to distinguish it from the owner-occupier market.  Are the systemic problems associated with owner-occupier defaults the same as those in the landlord market?

The lesson we should learn is that supply constraints lead to volatility and dislocations.  In cities without that problem, there was no price bubble, there was no rush of defaults.

Instead, we have decided that the lesson is that low income households shouldn't have access to ownership.  The control premium is extremely valuable for households that live in low-income neighborhoods.  It puts more families in the position of caring for their homes and for the neighborhoods.  It gives them a tremendous return on investment.  It puts them in a position where they internalize the gains of their own responsible behavior, and it can make them advocates for local changes that increase the value of location.

The lesson is that access and liquidity are public goods.  We should facilitate access and then manage the nominal economy so that real assets have stable nominal values.  It's not the fault of banks and low income buyers that home prices collapsed.

For zip codes with home prices below the median, during the two years 2006-2007, prices in Atlanta were stable and in Dallas rose about 3%.  In 2008-2009, those home prices fell by 22% in Atlanta and 14% in Dallas.  Why?  Why were low priced neighborhoods a lagging factor in cities that never really had a price bubble?  Because while everyone was complaining about how the Fed was stabilizing credit markets to bail out the banks, the one thing we absolutely couldn't stand for was to let those predators make loans to lower income households - that's what created this mess, right?!  So, even though the evidence that any of that ever happened doesn't show up at all in many measures of national homeownership and incomes, we have decided that the lesson we have learned is to created a housing market where those who have access to credit can buy homes and rent them for double digit returns, and the families that live in them get rising rents and none of the benefits of control and access.  The lack of control is just deadweight loss.   It is a cost and a risk to the landlord, and the benefits remain uncaptured by the potential owner-occupiers.

Public postures about low-income households that begin with the presumption that they are incapable of handling their own agency, and that financial institutions are powerful and predatory, seem empathetic, but really they are rooted in elitism, with all the baggage and targeted harm that comes with it.  It seems to me that this elitism has only garnered a populist veneer because it is supported by a foundation of anti-finance prejudice which has become the overwhelming point of view in this country, which led to the invention of a set of accusations that may have little basis in reality.  Prejudice is not known for being sensitive to marginal new information, unfortunately.  It will be very difficult for widely distributed growth to appear in this country again until the playing field in housing is leveled again - whether in terms of ownership or location.


  1. Fascinating post.

    Absolutely, finance home purchasing and unzone and dereg so there is lots of housing. Steel container housing is an interesting idea.

    I do wonder about home ownership in an era of two- income families searching for work, which may require relocation.

    For the purposes of a national capitalistic labor market, would a nation of renters actually be better?

    1. Thanks Benjamin.

      Actually, I think we might all have been wrong about that too.

      Here is an article and paper:

      They find the usual finding that homeowners take longer to re-enter the labor force. But, what's interesting is that they find that owners with a mortgage are more similar to renters. It is the free and clear owners who have different labor force behavior in contractions.
      I think what this means is that the slower labor force reaction from homeowners isn't due to the stress of sitting on undervalued property. It's due to the benefit of a safety net of not having a monthly housing expense. I think they are less mobile by choice. This is a good thing.
      I don't really have an opinion one way or the other regarding ownership. I think we should facilitate it but not encourage it. But, I'm not sure this is a big a problem as most economists have been assuming it is.

  2. In liquid housing markets, homeownership might work even in large capitalist national labor markets, as homeowners would know if they want to move to a new city they can easily sell.

    My guess is that with no zoning, easier building codes and no home mortgage interest tax deduction, we would see lower levels of homeownership, as housing became an ever-cheaper low-cost commodity. Builders would continuously improve designs and techniques. Maybe steel containers.

    BTW, Tyler Cowen recently posted on London house prices, and I thought it was one if his weakest responses. Instead of (as a libertarian) calling for dezoning, he said ain't much that can done, and doing something would lover house prices, hurting homeowners.

    Maybe he was acknowledging the political realities. But the American right-wing is hopeless when it comes to property zoning. They are for it, or mute.

    Ridiculing San Francisco or Manhattan is allowed. But not Newport Beach or home acreage minimums in Connecticut.

    1. Yeah. It seems like Tyler's being a little too open minded on that. Is there an actual example of a closed access city switching to pro-housing and failing to bring down prices?

  3. Unfortunately I think zoning is addictive and only gets worse. I cannot think of a city that has gone to lighter zoning.

    1. That's my impression too, which make Tyler ' s acceptance of the idea that more houses could increase prices a bit frustrating. But he's supporting the development of the other side of the story, so it's probably not fair of me to be frustrated. His open mindedness is his strength. A feature not a bug.