Tuesday, October 5, 2010

Why Not Rent?

(Once again, a guest post from Ed, kindly invited by notorious density lobbyist P. Trolleypole.)

Despite the collapse of the housing market, homeownership is still out of reach for many Greater Boston residents, according to a new study by the Urban Land Institute.
So begins an article from Saturday's Boston Herald. The article spends a lot of time tossing around median home prices in Greater Boston and discussing how out of reach they are for working class households, and then talks a little about an affordable housing program that is on the MA ballot in November. The option of renting never comes up, nor is there any talk about how to make or keep rents affordable.

I'm not opposed to worrying about rising costs of shelter in cities, but the outsized focus on homeownership drives me a little crazy. This fetishization is why we have tons of awful policy in this country:

- Mortgage interest tax deductions, which distort the home market, and the benefits of which go largely to the wealthy:
The deduction is wildly regressive. The tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year, according to recent research by James Poterba and Todd Sinai.
- Fannie and Freddie, which, for example, had the US taxpayer implicitly (de facto, at this point) guarantee 95% of new mortgages in 2009, and which have a heavy single-family bias, giving sprawl a helping hand

- FHA-subsidized loans, which explicitly put every taxpayer on the hook for tons of mortgages with only 3% down (and low downpayments are a strong predictor of default, especially when prices are falling)

The list goes on.

Meanwhile, this is all in support of a system that encourages households to (1) take on massive debts in order to (2) make a huge and completely undiversified investment in (3) a highly volatile asset. So, when bubbles pop and prices drop 20, 30, 40 percent, you have made sure that a large portion of your population has seen its wealth evaporate. On top of that, being so highly indebted makes households less mobile, and less able to find new opportunities - which is why you see higher unemployment in places with more homeownership - we've encouraged people to weld their escape hatches shut.

All of which is to say - maybe it's time to rethink how we house people. Should one's shelter really be tied to one's investments? Should we be paying more attention to affordable housing policies that help renters? Should we start dismantling all these subsidies, and maybe turning some of that money to causes that help low-income renters? This aspiring density lobbyist thinks so.


Bob Davis said...

This will come up sooner or later, so I'll drop it in now: So you're advocating cramped tenements for all but the "fat cats", rather like the workers' housing in the old Soviet Union? Americans may be forced to "downsize" their home ownership dreams, but they aren't going to like it. All they want are a yard for the kids to play in and a dwelling that doesn't have Mr. Bigfoot upstairs and domestic hostility in the adjoining apartment.

Anonymous said...

Not only does US housing policy batter renters, it also batters landlords, especially in places like Boston. Even though rents are high, landlording is not a profitable line of work in greater Boston, mostly because of market distortions, without which, Boston area landlords would be buying many more houses and converting them to triple family properties.

Anonymous said...

To Bob Davis: you know, there are lots of places in the world where people live in nice apartments and raise their families, where their kids play in the park rather than the yard, and learn their manners by learning how to get along with neighbors. Traditional American cities, prior to the post-war madness, fit that description nicely, and some still do.

Ed said...

@Bob: So to stave off communism, we need the government to pay to subsidize home purchases? OK then.

@Anon: agreed. I'm planning a post on rent control regulations sometime soon.

Bob Davis said...

Maybe it's a "conspiracy theory", but there's a school of thought that says that after World War II, the US government (with secret directions from Big Business) encouraged the building of suburbs with single-family homes and auto-oriented layouts. The idea was that if the "working class" was busy mowing lawns and maintaining houses, and traveling in individual cars, they wouldn't be gathered in groups where they would be targets for "Communist agitators".
This probably sounds like "what were they smoking?", and I can't give a source, but it's not something I would come up with on my own. I grew up in the days of the "Red Menace", the "Iron Curtain" and "Godless Communism" taking over more and more of the world; our younger reader weren't exposed to these fears. Regarding children playing in the park: I direct your attention to the "FreeRangeKids" website.

Anon256 said...

Buying vs renting is in some ways orthogonal to sprawl/density issues. For example, in the Boston/Somerville area I know many people who rent in one- or two-family houses, with yards, driveways, etc. Conversely, mortgage tax breaks also apply to people buying fancy new Manhattan condos. Home ownership and suburban sprawl are both cases of market distortion, and help reinforce each other, but it's perfectly possible to have one without the other.

Alon Levy said...

Bob, I haven't heard that theory. Do you have a reference? Because what I've heard is a lot more pedestrian: urban reformers thought that big cities bred crime and ethnic identity and pollution, and the only way to clean the cities up was to demolish the slums and build separate-use suburbs with single-family owner-occupied houses. Part of it was about offering a non-leftist solution to social problems, but there was no conspiracy there. This was decades before cars, lawnmowers, or the Red Menace.

Bob Davis said...

Alon: your explanation is probably a lot closer to the truth; over the years I've worked with a wide variety of people, some of whom weren't shy about expressing their particular beliefs. Sometimes I'd argue about their points, other times it was "I refuse to get into a battle of wits with an unarmed man."
Regarding the "market distortion" of encouraging home ownership. I would suspect that the real estate industry would "fight tooth and nail" at any attempt by the government to "correct" said distortions.
And a final comment on apartments: the one period in my life when I lived in one, my main concern was that the guy downstairs, who smoked like the proverbial chimney, would set his unit on fire some night while I was at work and barbecue my books, records and photos.

Adirondacker12800 said...

Alon, it's a common anecdote about suburbs and Levittown in particular. I've never gone looking for authoritative references. Think about it. If take the subway to work you meet all sorts of people from all walks of life and realize they aren't all that scary. While you aren't busy people watching you have the time to read the newspaper. Newspapers give you an much deeper understanding of events...

Robert said...

You guys are completely missing the point. A house you own is an investment -- rent is an expense. The difference -- you can live in your house at retirement, not have a job and be fine. How are you going to pay rent when you're 70?

Makes no sense to pay someone else's mortgage through rent when you could just be paying your own mortgage and keeping that money as wealth...

Anonymous said...

Robert, in theory someone renting:

a) has greater mobility and hence can move to where the work is quickly, avoiding long commutes or expensive house sales and earning more as a result.

b) does not have to pay the principal on the house and hence can put that money into something that will earn more (given the state of the US economy, perhaps Chinese stocks?). It is this option which is used to fund retirement.

It is a common economics class question to work out whether it is better to rent or buy, and in most places renting is the better option. The main reasons to own a house are the joy of renovation and modification and for those unable to remain committed to a sensible investment plan.

US economic policy has been focused on encouraging home ownership through every trick they could come up with (e.g. tax offset for mortgage). Despite this, renting is still a better option, but as a result rental in the US is worse than other parts of the western world.