Monday, January 31, 2011

Homeownership and Social Justice

I am reading and enjoying Simon Johnson and James Kwak's 13 Bankers. Like a lot of recent stuff (including an OECD report), it takes a swipe, if a mild one, at the virtues of homeownership.   If people think homeownershipp is overrated, I can live with that (even if I disagree with it. Where I do have a problem is when people argue that government "pushes" homeownership on people, whether they really want it or not.

I am not sure that the pushing matters that much--it is entirely possible that people, for reasons beyond financial reasons, want to own houses in particular and real estate in general.  Two things stick with me:

(1) I was talking yesterday with a developer here in India who is trying to building market-rate affordable housing.  He faces a number of hurdles, one of which, he said, is "Indians' obsession with homeownership."

(2) Years ago, when I was in Madison, the guy who cut my hair loved to talk about the rental property he owned in Florida.  It would, he said, be the source of his retirement income.  I asked him why he was so undiversified--why he didn't sell his place and put the money in an index fund.  His reply was that he didn't trust Wall Street, and that he needed an investment that he could "touch" as well as control.  I told him his mistrust of Wall Street was misplaced--shows what I knew at the time.

The point is that there is something about real estate that reduces agency problems,  One may not be able to control markets, but one can control the management of real estate that one owns.  I do remember when I left the rental market for the owner market, I was very happy, not because I thought I would make out financially (house prices in Madison had been stagnant for years), but because I disliked my landlord, and was relieved that I would no longer have to write a check to him. 

This is not to say putting people in houses they cannot afford is a good idea, and I have long been dubious of very low downpayment schemes (I do think homeowners who put no equity into their houses are not really owners).  But it is a little too easy for people who own houses (or have the choice to do so) to say it is not important to make the option available to others.  Freedom to some extent means the ability to take control of one's own life, and to avoid agency issues as much as possible. 

I freely confess that this is all supposition based on informal observation.  Some work has been done on how ownership solves some agency issues, but I think it is an understudied phenomenon.  If anyone wants to help me think about how to model such things formally, I would welcome the assistance.

6 comments:

Julian said...

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Kien said...

Hi, Richard. I think that it is a mistake for governments to pursue high homeownership rates as a policy goal. On the other hand, when I reflect on my own decision to acquire a residential property, there seem to be two good financial reasons for doing so.

First, it's an imperfect hedge against rising rents (which would be a big part of my expenditure). Second, it seems to me that residential property is the one investment asset where individuals like me are not at a serious disadvantage to professional investors. Professional investors buy commercial property but seem to stay away from residential property, correct?

I tend to think that a reasonable investment strategy for a middle income household is to acquire a single residential property, and invest its remaining wealth in a diversified portfolio. Do you agree?

Having said that, I accept that buying residential property can be hugely risky given the history of housing booms and busts. I wished central banks take on the role of regulating minimum home deposits as a way to smooth out housing booms and busts. Unfortunately, central banks and economists don't seem to think it's an appropriate role for a central bank. What do you think?

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Bill said...

Yes I agree that tracking homeowner rates as a policy goal doesn't really make much sense. activities for youth groups

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HcoRealEstate said...
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