| Posted: April 28th, 2011
When I was in high school debating farm subsidies in the 1960s, I couldn’t understand why the U.S. government paid farmers not to grow crops when many people had too little to eat. I was so vexed, in fact, that I decided to learn economics. Now fast forward. Today, I’m an economist and it’s still easy to imagine a high school student wondering why so many houses stand vacant when many families still live in substandard places or bear punishing rent burdens. Learning economics did help me understand (though not agree with) farm policies. And economics does illuminate what’s going on in today’s housing market. More important, economic analysis can point to sensible policies for dealing with the food-farm subsidy issue and the double-edged housing issue.
Economics teaches that having needs and having the ability to pay to fill these needs are two different things. Many ill-fed Haitians can’t afford to buy the rice or wheat produced and shipped by U.S. farmers. Yet, if countries stopped paying farmers to idle fields, more food would come to market, driving food prices down and poor consumers’ buying power up. But farmers in the U.S. and many other countries have outsized political influence and politics often rewards small cohesive groups over large dispersed populations (see Mancur Olsen’s classic The Logic of Collective Action). U.S. government policies favor producers (in this case, farmers) at the expense of consumers.
Now on to housing. Today, we see rising numbers of vacant units and a residential building industry operating far below capacity, weakening the economic recovery. This excess supply of housing may have a silver lining—falling home prices making homes more affordable—but that has yet to fully materialize. In fact, though economics also teaches that lower prices should set off a wave of home-buying, the reality is that more families are doubling up or having trouble finding adequate housing. Why?
Economics to the rescue again: increases in unemployment rates have depressed demand but not enough to prevent a rise in rents. Since 2007, the Bureau of Labor Statistics reports, rents are up nationally by about 10 percent. Rent burdens are rising partly because the recession depressed income but also because the costs of renting increased.
The housing paradox is more complex than the food paradox, partly because housing is multidimensional and durable while food is literally here today and gone tomorrow. Each housing unit yields a long-term “flow” of residential services calibrated in terms of space, quality, and location. Most homes are immobile, so they may not be where good jobs and good schools are. Also, few can afford to pay cash for a home and its 30 to 40 years of residential services, just as few could pay for 30 years of food all at once. That’s why it makes sense to rent or to borrow money to buy a house and to pay off the loan in line with the monthly service flow. But, it’s even more complicated than that: like other durable goods, a home has a current market value that incorporates expectations of how people will value the house and the neighborhood in the future.
These economic principles raise questions about why so many people are paying more in rent for housing services than the monthly carrying costs of owning a comparable dwelling. Are renters too focused on homes as investment properties instead of as places to live and put down roots? Does the inability of potential buyers of middle- and low-priced dwellings to obtain financing explain why renters are not buying even at today’s depressed prices? Are lenders too worried about future home prices to provide adequate mortgages? Or are potential buyers afraid that home prices haven’t yet hit bottom?
As of now, we don't have enough evidence to weigh each factor. But economic analysis does help us frame the housing problem in a way that suggests constructive policies. My favorite is a plan to deal with high levels of vacant homes alongside high rent burdens for many families by creating 1 million homeownership vouchers. Other options might involve dealing more creatively with risks that may be stopping prospective homebuyers from financing home purchases, educating people about how to evaluate the tradeoffs between renting and owning, and transforming more owner-occupied homes into rental properties, a process that has already begun.
Assets and debts, Built Environment, Economy
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