Keep Out

Felix quotes from a Fed paper on homeownership:

Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.”

Felix follows up on this, saying:

It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership.

He goes on to focus on the first half of the equation, namely, the extent to which underwater homeowners have an incentive to allow their property to go to the dogs. I want to focus on the second half of the paragraph, on community benefits. The Fed analysis continues:

The notion that these capitalization effects prompt homeowners to act in the best interest of the property and the community underlies the “homevoter hypothesis” advanced by William Fischel (2001). Asserting a close connection between homeownership and civic engagement (hence the term “homevoter”), Fischel argues that homeowners take an active interest in the policy decisions of the local government because these decisions affect the long-term value of their property. Homeowners will support efficient public policies and projects—say, those that do the most to enhance the quality of the services and schools in their communities and thus to maximize the value of their homes—in much the same way that a corporation’s shareholders will support private projects that have a positive net present value for the firm.

It’s clearly right that homeowners take an active interest in local policy in an effort to protect and enhance local services and the value of their homes. But that doesn’t necessarily mean that homeowners are generating societal benefits. Take schools, for example. Homeowners take many actions to boost the performance of local schools, both because they’re interested in obtaining a quality education for their children and because school quality is capitalized into home values. But how is this accomplished? If the improvement is primarily achieved through careful monitoring of school budgets and methods, then homeowners are indeed generating some societal benefits. But if it is primarily achieved through efforts to exclude lower-income households from the school catchment area, then homeowners are actually reducing societal welfare. And obviously that’s one of the main ways that homeowners protect the quality of their public services — by crafting zoning rules that have the effect of strictly limiting the kinds of households living in an area. One might argue that that’s their right. Perhaps, but such homeowners clearly don’t deserve a subsidy as reward for their behavior.

It’s also not clear that homeowners are necessarily maximizing the value of their properties. Homeownership, as I’ve mentioned before, is an undiversified, highly-leveraged, immobile, illiquid financial bet. Having made such a bet, homeowners become very risk averse. We can imagine situations in which new developments are likely to benefit local homeowners and increase the value of their properties, but have benefits uncertain enough that there is a small but real probability of a negative effect on local property values. Highly risk-averse homeowners may opt to oppose the project, despite the good chance that they’d benefit from it.

One should also consider the uneven distribution of costs and benefits. A development is likely to have benefits that accrue across an entire neighborhood but with some costs that will fall most heavily on homeowners located closest to the development. The proximate homeowners have an incentive to fight loud and hard against the development while the rest of the area has little incentive to mount an equally intense defense. The asymmetric lobbying will lead a lot of project to die, depriving neighborhoods of beneficial developments and leading to property values that are lower than they could be.

Homeowners will aggressively protect the value of their home; that’s clear. And that will often — probably most of the time — come down to efforts to exclude newcomers. And this is what we should expect! Given the ability to do so, a firm will opt to exclude rival firms. Why we’d want to subsidize this activity is beyond me.


  1. Donnie says:

    I don’t understand the argument that homeownership is beneficial because the homeowner have a financial interest in the home. Yes, a renter may not have a financial interest, but the landlord certainly does.

  2. Chaz says:

    It’s not necessarily the case that homeowners will want to exclude newcomers and this is especially not the case in rapidly gentrifying communities. Just look at the development in the Columbia Heights neighborhood of DC. Aside from some anti-corporatist concerns, the DC USA development (Target especially) is almost universally loved and no one is going to say that things were better 10-15 years ago.

    Although long time residents may oppose newcomers, unless they’re renters, it’s certainly not for economic reasons.

  3. rjs says:

    what happens when youve owned a house for 40 years and you’re too old & tired to keep up with all that upkeep anymore?

  4. Dan says:

    One big benefit of homeownership is the opportunity to improve or not improve your home as your budget allows. As any homeowner knows, there is enormous flexibility here. If your present finances are tight, you ride it out and leave your house alone. When that bonus comes in, or that inheritance check from an uncle arrives, you get the roof done or get that addition you had been holding off on. Indeed homeowners can bank wealth in a way that is unavailable to renters.

    This is an enormous benefit for the elderly. With a home they own clear, and a limited income, they can do only basic repairs or changes and let the home age gracefully with them.

    Renters have no discretion on this. If their finances improve and they want residential upgrades, they must move, an enormous task if they have a family. Conversely, if the property owner has plans for upgrades, low income people may be squeezed for things they would be willing to do without.

  5. Kristen says:

    @Dan- you have the better arguement for homeownership I’ve seen. It’s for people who know they will be somewhere for 10-20 years and their primary motivation is a roof over their heads.

    However, in the recent past, people bought homes for status, for investment, for ATM purposes and they also left homes as soon as someone they didn’t like showed up. It isn’t like they tried to engage these people, they just looked at them and said lets go.

    We need to work on increasing neighborhood pride and connectivity, with homeowners, renters and landlords, as well as state and local governments who have sometimes outdated notions of how homeowners and renters function.

  6. Ben Ross says:

    It’s clearly right that homeowners take an active interest in local policy in an effort to protect and enhance local services and the value of their homes.

    I don’t think it’s so clearly right at all. Homeowners often maximize the status of their community at the expense of property values. The example I love is the fierce opposition to development at the Friendship Heights Metro station in Washington. Surely, no one thought that Tiffany’s and Jimmy Choo were going to lower property values. I wrote about that more here.

  7. frances says:

    I can’t remember who said this, but I heard it on an NPR show a year or so ago, regarding the homeowner tax credits. Basically, when you incentivize something in the tax code, you are punishing the other side of the equation. So when you give homeowners a tax credit, you are punishing renters. And I’m in total agreement with the assessment that home ownership is a huge financial liability for most people that we have wrongly fetishized. We definitely don’t need to be subsidizing this kind of one-size-fits-all financial investment, as if it were a 401k. Home ownership is right for some people, it’s wrong for a lot of people.

  8. In most cases (at least in the UK), residents’ opposition to new developments is not about what it’s supposed to be about. Typical anti-building arguments include the aesthetics of new houses, the kinds of people who might move in, and costs (e.g. reduced views or extra traffic) incurred by people next to the new build. But none of these are the real reason why people object.

    The phrase that gives away the underlying dynamic is one you hear at dinner parties in every middle-class neighbourhood: property values. It’s a simple matter of restriction of supply: because demand is fairly inelastic, existing homeowners benefit from artificially high property values if they can restrict supply just a little. When there are 100 people wanting a house and only 99 houses, prices are going to be much higher than if there are 100 people and 101 houses.

    There is usually room for that 100th person to stay with parents, share with a friend or make some other temporary arrangement – so the market can exist in a short-run equilibrium, giving existing homeowners a high premium. All those zoning restrictions are just a Coasean excuse, giving power to the property owners to keep the market undersupplied.

    Coase’s argument about property rights does not work in this case, because the main beneficiaries of a trade – future purchasers of homes in the neighbourhood – are not around yet, and thus not in a position to join in a transaction which would increase economic efficiency overall.

  9. Cynic says:

    Zoning is compelling. But I actually think that your example of schools works against Coase’s argument.

    Homeowners, as you argue, “take an active interest in local policy in an effort to protect and enhance local services and the value of their homes.” But that’s not at all the same thing as supporting all actions that maximize the value of their homes. Often, they will act in ways that may restrain or even depress that value, if they see the change as likely to hurt them in other ways. Home values, after all, are typically unrealized – whereas negative impacts can be felt tomorrow.

    A few concrete examples help to illustrate the point. Communities tend to have the easiest time raising taxes or issuing bonds for schools when a high proportion of their residents have or expect to have children in the schools. In communities with, say, substantial elderly populations, that fight gets much harder. Many seniors would rather see their home lose 20% of its value – a value unlikely to be realized in their lifetimes, anyway – than be forced to cut back on discretionary income or to move away by higher taxes. And that’s rational, if selfish.

    Similarly, many residents who strongly dislike certain kinds of development will vote to oppose it, even if that development might substantially increase the value of their home. It benefits their home-as-investment, but comes at the expense of their home-as-consumer-good. Housing is fairly illiquid, and their are huge costs associated with selling and buying somewhere else. Not just broker’s fees, which might erase any gains in their own right, but the time and disturbance, switching schools for the kids, finding new neighbors and centers of community, etc. How much is it worth to people to stay where they already live? Judging by the potential gains in value they regularly vote to forego, quite a bit.

    I’d love to see more data on this. But I suspect that rentvoters are actually more likely to support investment in infrastructure that produces real social value. They may well be less likely to vote. But because they’re somewhat insulated from the costs of property tax increases, the principal form of local revenue (or at least, those costs that are passed along are well-disguised), but still stand to enjoy all of the benefits of such investments in equal measure, they’re probably much more likely to support tax increases and public investment.

    And in fact, I’d submit, that’s exactly what we see. Urban areas with high concentrations of renters often provide far more extensive public services than the suburbs.