Monday, June 17, 2019

Mercatus Series on Housing Affordability

I have a blog series on housing affordability that is slowly rolling out (1 per week) at The Bridge.

I find discussions about housing affordability to be frequently frustrating.  One reason is that homeownership is generally treated as if it is a wholly different type of consumption than tenancy is.  This is odd, because in national accounts, the BEA treats tenancy the same for both owners and renters.  I find it useful to disaggregate our economic activities regarding shelter so that every home has an owner, a financier, and a tenant, regardless of whether those agents are all different or are all the same individual.

There is certainly a risk that comes from becoming an owner-occupier and taking ownership of a single large asset that can frequently be much larger in size than your total net worth.  On the other hand, there is also value that comes from getting rid of the principal-agent problems that come from having various stakeholders who all have competing interests on a single asset.  For owner-occupiers, those conflicts are erased, which seems to lead analysts to act as if these three different relationships to a property disappear when those agency conflicts disappear.

In this series I maintain these three roles as factors for all homes - financier, owner, and tenant - and consider various aspects of housing markets and housing policy.  This process has led me to new points of view regarding these issues, and I hope you find something to think about in each post, also.  In hindsight, I find that the posts have a veneer of dryness, but they are short, and I am hopeful that each one has at least one new idea that will shift you in your seat a bit and help you to take a few moments to deepen your own sense of how these factors play out in the marketplace and in the various public policies that affect that marketplace.

The tl:dr on the first four parts:

  1. Thinking Clearly About Housing Affordability:  "Here is the core analytical error: housing affordability should be measured in terms of rent, but our understanding and policies have erroneously focused on price—to disastrous ends.  From monetary policy to credit policy to regulations on local development, responses to the housing bubble have consistently and explicitly aimed for less residential investment, fewer buyers, and fewer homes.  Limiting the supply of homes has had a predictable effect of increasing rents.  In other words, the problem of affordability, in terms of price, was “solved” after 2007.  Affordability in terms of rent was not.  Understanding the difference between these two measures will be an important factor in correcting the policy errors that led to the crisis and creating better, more equitable, more stable economic outcomes in the future.
    I argue in my book, Shut Out, that the housing collapse and the financial crisis were not inevitable.  They weren’t even useful.  In fact, their very purpose was mistaken.  The fundamental measure for housing affordability is rent, not price.  And, trying to bring down prices instead of bringing down rents inevitably will fail on its own terms.  In the long run, prices will be determined by rents anyway."

  2. What Are Landlords Good For?:  "More efficient markets lead to higher real estate transaction productivity. The resulting higher prices convey that information: owning a home is more valuable now, because it can be done with less hassle. Landlords would be less necessary because transaction costs would be a smaller problem, making homeownership more valuable.  Only focusing on price might tempt one to suggest that transaction cost-reducing innovation should be avoided because it would only increase prices."

  3. Homeowners Make the Best Landlords:  "When considering the benefits of home ownership on the margin, the focus should be on capturing the excess yield that seems to be widely available to owners.  It is this yield that is most important to marginal potential owners, not capital gains... It may be more accurate to think of that excess yield as a form of patronage.  A lucrative wage available to those with access to ownership.  The wage is earned by performing the duties and taking the risks of a landlord. Upon becoming the owner, the wage remains, but the duties of the job can be shirked.  There is no problem tenant to evict.  No vacancies to fill.  No complaints to manage.  It’s a cushy job you can get because your Uncle Sam pulled some strings down at the bank."

  4. Real Estate Investment Doesn’t Increase Spending:  "The housing bust is creating more excess capital income than a housing bubble ever could have."


  1. Great stuff.

    I hope you resort to all capital letters when discussing the role that restricted supply, especially PROPERTY ZONING, plays in higher residential rents.

    Perhaps to attract readers, you should dramatize the results of America's housing policy. For example many pundits posit that America's trade dispute with China could trigger a global recession. Great headlines.

    Taking this as a que, you could posit that America's housing policies could trigger a global recession----oh wait, that already happened. Something about the Global Financial Crisis in 2008...

    1. The problem is those policies were broadly popular, though I have to say, I tend to get positive feedback from live audiences.

  2. KE--You have chosen a hard row to hoe.

    My advice is free and worth every penny, and that is always lead with the idea that you are proposing ways to lower housing costs and increase living standards for Americans.

    Un-zoning property and easing up credit will lower housing costs (and lower labor costs to West Coast-NYC employers).

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