Thursday, March 17, 2022

16 Part Series on Housing Affordability

In 2019, I wrote a 16 part series of posts for the Mercatus Center that laid out a way of thinking about housing affordability.  Here are the links to those posts.

  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."
  5. Rising Prices, Lower Rents; Rising Rents, Rising Prices: "The suppression of credit has lowered Closed Access prices, but they are still high because rents are high. Open access housing has been pushed to a level well below previous norms. But attempting to solve the price problem in Open Access cities has created a rent problem...Where building new homes is permitted, rising prices lead to declining rents. But, rising rents lead to rising prices. In the long run, even the solution to rising prices begins with a focus on lowering rents."
  6. "The Myth About Bubble Buyers": (F)or households 45 to 54 years in age, the homeownership rate in 1982, when the Census Bureau started tracking it annually, was 77.4 percent. It bottomed out at 74.8 percent in 1991 and then recovered to 77.2 percent at the peak in 2004. By 2017, it was down to 69.3 percent!…..Rental expenses as a proportion of incomes (Figure 1), belie the conventional wisdom. The rental value of owned homes was more stable as a portion of owner income than the rental value of rented homes from the late 1990s to the mid-2000s. In other words, if there was an increase in relative spending on housing, it was among renters. The rental value of homeowners was rising in line with their incomes. There is no sign of marginal homebuyers being induced into homeownership and overconsumption.
  7. Squeezing Unqualified Borrowers: "Considering this set of circumstances, the idea that housing affordability is getting worse because prices are high and that the solution is even higher interest rates or tighter credit access is a disastrous misreading. It will lead to a vicious cycle of segregation between households that can qualify under today’s standards (and who then can buy ample units at favorable terms) and households that cannot qualify (and who must keep economizing while a large portion of their wages is transferred as rent to the ownership class). There are two options. Re-opening credit markets to entry-level buyers will return the market to a more equitable equilibrium. Maintaining the market as it is will continue down the path of settling at a new equilibrium where certain households live in smaller, less adequate units, either because of size, amenities, or location."
  8. "Tight Lending Regulations are a Wealth Subsidy": Thinking in terms of rental value, public policies and market innovations that lower mortgage interest rates can be broadly beneficial to consumers, even if those benefits don’t accrue to the actual borrowers who use those low rates.  That is because higher mortgage interest rates have a similar effect on price as exclusionary lending standards.  Downward pressure on price creates a rental subsidy for home buyers who don’t require a mortgage.
  9. "Property Taxes Are Rent to a Public Landlord"If there is concern that the net effects of government policies, in total, favor housing and lead to market volatility, a return to higher levels of property taxation can be a useful tool for countering it.
  10. Property Taxes Can Be a Tax on Monopoly Power.: "If politically maintained monopoly power is going to remain, claiming monopolist profits through taxes is an improvement. The fact that the tax doesn’t affect rents is a sign of efficiency. If rents must be elevated, better that they go to local public services than to the real estate cartel."
  11. Low Property Taxes and Obstructed Housing Supply Are a Bad Mix "It would seem that raising property taxes would make housing more expensive.  They are, effectively, a tax on materials to build homes.  But the binding constraint to affordable and reasonable housing in twenty-first century America isn’t material.  It isn’t a lack of affordable physical space.  It is the political obstruction to placing those materials in dense urban centers."
  12. Are Property Taxes Regressive?: "A region that allows ample new supply and imposes higher property taxes is friendlier to households with lower incomes than a region with obstructed housing supply and low property taxes."
  13. Income Tax Benefits to Homeowners Are Regressive: "Two of the most important changes to the tax code made by the Tax Cuts and Jobs Act of 2017 (TCJA) relate to housing: a reduction in the deductibility of state and local taxes and a reduction in the mortgage interest deduction."
  14.  "Because of Housing, All Taxes on Capital Tend to Be Regressive".: "(T)he income tax code, as it exists, has regressive effects regarding housing affordability.Given those effects, it is inaccurate to treat capital taxation in general as a progressive tax. Corporate taxation, in general, creates a regressive rent subsidy. A different tax regime that focused on property taxation rather than generalized capital taxation could plausibly produce public revenue in a way that would be more progressive than a tax code that taxes capital income more generally. This should cast doubt on common presumptions about how and why to change the tax code."
  15. Does Homeownership Really Increase Household Liabilities?: "The idea that paying $700 in rent is preferable to a $300 mortgage payment comes from the idea that a potential home buyer would be adding a new liability to their household balance sheet. It would involve leverage, and leverage is dangerous. But this idea is, itself, a product of mental framing. There are assets and liabilities that we explicitly include on balance sheets, like the value of a home and a mortgage, or the market value of a corporation’s future profits. And there are assets and liabilities that we don’t explicitly include, like future rental expenses or the market value of a laborer’s future wages. ------The explicit financial engineering that spread before the financial crisis has taken on a lot of criticism over the past decade.  That financial engineering, ironically, created risks and costs that were more transparent and visible than the implicit financial engineering that has been an unwitting side effect of deleveraging Americans’ explicit balance sheets. A significant part of corporate financial analysts’ academic training is to properly account for the liability of the rents corporations have committed to paying.  Wouldn’t it be prudent for mortgage regulators to account for this liability also when evaluating the benefits and costs of the lending standards applied to households?"
  16. A conceptual starting point for housing affordability and public policy: "Understanding this value and the systematic returns that homes provide leads to a somewhat paradoxical conclusion that (1) homeownership is usually a good investment, and (2) the smaller the investment, the better. In other words, an owner-occupied home with a low rental value can be a great investment, but the downside is that it requires living in a home with a low rental value. The various posts in this series have considered housing affordability with a focus on rent. This focus has led me to the following policy suggestions: we should (1) maintain relatively high property taxes, (2) reduce or eliminate income tax benefits of homeownership, including the non-taxability of the rental value of owned units, (3) eliminate urban supply constraints, (4) reduce regulatory barriers to mortgage lending, especially in low tier markets, and (5) encourage innovation in real estate markets that reduces transaction costs."


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