Mom, Apple Pie and Mortgages

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New York Times

By: Robert J. Shiller

March 5, 2010

 

FOR decades, the federal government has subsidized housing -- particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.


But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society -- a political necessity because so many voters own homes and are mindful of their resale value?

 

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It's important to remember this as we consider re-engineering our institutions as the crisis ebbs.

 

Federal subsidies for housing essentially began in the Great Depression with, among other things, the creation of the F.H.A. in 1934 and Fannie Mae in 1938. It all started for a simple reason: more than a third of all the unemployed were identified, directly or indirectly, with the building trades. At the time, there seemed to be no way to reduce unemployment without stimulating housing, and much the same is true today.

 

But consider what will happen once the economy is again operating at full capacity. Basic economics tells us that when Americans, over all, spend more on housing, they must ultimately spend less on something else. Why should housing consumption be better than other consumption, or investments that people might choose?

 

This time, the best answer isn't found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting -- often in tenements or mill villages -- has been linked to the oppression of a landlord.

 

In his classic 1985 book, "Crabgrass Frontier," Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.

 

Back in 1899, in "The Theory of the Leisure Class," Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as "conspicuous consumption." By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn't need.

 

What is specifically American here -- though it's increasingly seen in other countries, too -- may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.

 

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today. A cardinal tenet is that people should diversify -- meaning they shouldn't put nearly all of their financial eggs in one basket, which is what homeownership now means for so many people.

 

American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky because home prices can and do decline, as we have learned so painfully. Leverage a risky investment 10 to 1 and you can expect trouble -- and we have plenty of it today. More than 16 million homeowners owe more on their mortgages than their homes are worth, according to Mark Zandi of Economy.com.

 

If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.

 

But first, we should rethink the idea of renting, which could be a viable option for many more Americans and needn't endanger the traditional values of individual liberty and good citizenship.

 

Switzerland, for example, is a country with strong patriotism, a fighting spirit of national defense, a commitment to freedom and tolerance, and a low crime rate. Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States, according to the two countries' 2000 censuses.

 

Swiss national identity doesn't depend on homeownership. Instead, Riccarda Torriani, a historian at the Swiss Federal Department of Foreign Affairs, links the country's sense of identity to such things as its system of direct democracy, which enforces popular participation in government; the idea that its citizens are frontier people (living in or near the rugged Alps); and a history of collective courage in defense of freedom, even when outnumbered.

 

BUT America isn't Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs, often with distinct features. If many of these homes needed to be converted to rental units, home prices might well drop.

 

A stock of apartment buildings in central cities, of course, makes rental management much easier. This is true in Switzerland, as well as in American cities like New York, which aren't typical of the rest of the United States. We need to consider a gradual transition toward new kinds of housing finance institutions -- entities that may lead us to a different kind of housing, yet preserve our core values. Although such innovation isn't likely to end subsidies, it should refocus them on enhancing the qualities of life that we really value.

 

We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience -- and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.

 

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

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This page contains a single entry by Ernest Roberts published on March 8, 2010 4:41 PM.

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