Josh Barro of the New York Times’ Upshot blog wants to know why we don’t pay for our housing the way we pay for food. The result is an article only a childless urbanite could write. Barro’s answer reveals why exercises in pure economic theory should not be attempted without some basic familiarity with the day-to-day lives of human beings who make economic choices — and why economists should look harder at their conclusions when they assume that a large majority of economic actors are choosing irrationally.
Foodowners and Rational Economics
Here’s Barro’s premise:
Imagine if we bought food the way we buy housing.
Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.
Buying that stream of future food would be expensive, so you’d get a loan from a bank to cover most of the cost, secured by your interest in those future chicken breasts. And if for some reason you didn’t need your chicken contract anymore (you became a vegetarian or you moved out of the delivery range of your chicken supplier), you could sell the contract at the current market price.
Analyzing the differences in the way we pay for different classes of goods — housing, food, healthcare, education, transportation, energy, etc. — can be a useful thought exercise, and Barro’s exercise makes some valid points: home ownership is not a particularly great investment, viewed solely as a financial asset; the large installed base of homeowners creates both a political and economic constituency for keeping housing prices high; and housing bubbles are larger and more destructive than bubbles in food prices, which tend to self-correct pretty quickly.
Even as a high-level financial analysis, however, Barro goes astray when he speculates that in his alternate universe of “foodowners,” “[p]eople might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit.” In fact, these “foodowners” already exist: we call them farmers, commodities investors, commodities futures merchants, and companies in various parts of the food industry, and they have been buying and selling futures contracts on agricultural commodities for centuries (the Chicago Board of Trade started trading agricultural futures in 1864). (Except onion futures, because onion futures are illegal). And foodowners have their own long and dreary history of rent-seeking from government.
Economics presumes a baseline level of rational behavior by consumers. Economists, however, should never make the mistake of ignoring consumer behavior they regard as irrational. Instead, they should be willing to recognize that “rational” in this context does not necessarily mean “providing positive returns on arbitrage against other asset classes.” What Barro should have asked himself (as any real economist should) before declaring that vast numbers of homebuyers and homeowners have been acting irrationally for millenia in buying their own homes is: what are they getting out of it that my analysis is missing?
Now, when you see people doing something that doesn’t appear to make sense, it is very often the case that government and/or lawyers are behind it. But the drive to own one’s own home is far too ancient and universal to be blamed on government interventions like mortgage tax deductions or implicitly-subsidized government-sponsored entities like Fannie Mae (whatever their roles in the functioning of that market). It is demonstrably the case, historically, that consumer desire for home ownership created those government interventions, rather than the other way around. It’s like Bill James’ answer to why baseball is basically a sport, not a business: because if the economics of the game collapsed but the interest in the sport remained, some new economic arrangement could be found; if the interest in the sport collapsed, the economic structure would evaporate overnight. We have home-ownership-market subsidies because people want home ownership and demand that government make it more available, not because market distortions created an interest in home ownership that did not previously exist.
The Virtues of Home Ownership
Here is Barro’s entire discussion of the virtues of owning one’s home rather than renting it week-to-week the way we restock our supply of chicken breasts:
I will grant that there are some advantages of homeownership. Owning offers people a sense of security, as well as the freedom to customize their residences as they see fit. Those are perfectly good reasons to buy a home as a consumption good; it is not a justification for homes (or chicken breasts) as investments.
As any homeowner could tell you, this — complete with the rather snide tone in which he refers to a “sense” of security — is an appallingly incomplete view of why people value owning their own home.
To begin with, even as an economic matter, Barro again ignores or at least vastly understates some very significant factors. Homeowners have a long-term stable residence, which renters may not. That means the ability to make investments in property that is technically movable — beds, entertainment centers, pool tables — but that costs a lot of money to pack up and move. Trained economists call these “transaction costs.” By contrast, there is zero economic cost associated with switching the place where you buy chicken breasts (or very close to zero even if you have some sort of frequent-buyer plan with the food seller, in which case you may also pay that cost when you move away from the chicken store). The more you own, the higher your moving costs are and the more of your valuable time that you lose every time you move. (You can alleviate some of the risk of moving with a long-term lease, but that exposes you to many of the same economic costs that Barro associates with ownership). Moving also imposes other meaningful costs on your time — changing your address and voter registration, hooking up cable/phone/internet systems, learning new directions to get places, finding new stores you like, finding a new church and a new school system, and so on.
The last part is critical, because the value of owning rather than renting is decisively altered by having children. People with children, even people without a whole lot of disposable income, have a lot of stuff, and a lot of commitments to their community, starting with the fact that where you live limits what choices of private or religious schools you have, and limits very severely what public school you can use.
And of course, for parents, the value of being rooted in a community, and at a fixed address, and not dealing with the headache and hassle of frequent moves, goes well beyond the economic and transactional. Community is vitally important to children, and also vitally important as a support system for stay-at-home moms — not for nothing does the phrase “it takes a village to raise a child” poll well enough to find a home on the cover of a Clinton-authored book. The fact that human relationships cannot be quantified does not mean that economics should ignore how they affect choices; indeed, it is often the things that are beyond quantification that are the most valuable of all, and the most powerful in driving economic behavior. Schools, churches, community groups, neighbors, and neighborhoods make up much of the fabric of our childhoods and our lives as parents, and even a move of a few blocks can feel traumatic for a small child. Anybody who moved as a kid remembers the experience vividly, while most of us could not reconstruct the times when our parents started buying groceries from a different store.
“The freedom to customize their residences” is also a pitifully inadequate phrase to communicate the bond between homeowner and home. No economic analysis can fully capture the reason why men and women have always devoted so much effort to their yards, their gardens, their kitchens, even (in today’s horrid phrase) their “man-caves.” We do not merely invest our money in our homes, but our time and our labors of love — go spend a day at Home Depot or Bed Bath & Beyond and you’ll see that love (and at times even obsession) in full bloom. Renters invest some of that time too, of course, but they are denied the full benefits as surely as a potted plant lacks the roots of an old oak.
A homeowner can also pass on a home to the next generation, and there too is a legacy deeply freighted with emotional resonance. There will never be a house like the one you grew up in, and a family that can hand it down over generations has a bond with what Lincoln called the “mystic chords of memory,” a sense of continuity that can be hard to put into words but has been a central theme of literature and popular culture throughout history. To pick just a few recent examples from popular culture, think of the myriad machinations of the landowners on Downton Abbey, or of Miranda Lambert’s fantastic 2010 country music hit “The House That Built Me”:
There is also a powerful social and political aspect to home ownership, one that transcends any particular culture or legal system. There is no more potent symbol of having made it, having achieved even the modest level of economic success and stability, than owning a home — there is a reason we immediately associate it with the phrase “the American Dream.” The pride of a new immigrant family in being able to afford land in America is a staple of the immigrant experience.
And the homeowner is free, in ways no renter is. There’s no security deposit, no landlord with an extra key, no rules but the law, and if you own land (as opposed to a condo or attached house), no upstairs or downstairs neighbor to complain about the kids or the dog or your guns or your electric guitar or your pot smoke or your guests or the fireworks you set off in the yard. Technology and law have eaten away at the edges at the ancient doctrines built around the notion that “a man’s home is his castle,” but there remains a deeply embedded belief in American hearts, and seen throughout our legal and political systems, that the privacy of what you do and read and say in your own home is something uniquely your own.
There is a reason why there remains to this day such resonance in the tale of freed slaves being promised and then denied “40 acres and a mule” — because a man with 40 acres was free. Outside the U.S., that feeling can be even more important: political instability can more easily destroy the value of liquid assets than land, and when society itself fails, the use of land as a family’s last line of defense can be even more vital. Think of Don Alejo Garza, who did not die for his food.
With freedom, likewise, comes responsibility: a neighborhood of homeowners will invest more personal, political, and financial resources in everything from schools to volunteer fire companies to neighborhood crime watches, precisely because they have a long-term stake in the place. It was trust in that sense of responsibility that led to the Homestead Act of 1863, and why it was so successful while every experiment in collective farming has met with failure.
A boat, they say, is a hole in the water into which one pours money. Strictly considered as a financial asset, many homes are indeed the same, and the past decade has reminded us that — at the margins — some people really should have kept renting rather than buy.
But a house you own, where you raise your family and do as you please, is still a home. And if that word means nothing to you, maybe you should leave housing economics to people who understand it.