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 measuresâ€”such as fixing a leaky roofâ€”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 â€œpositive externalities.â€
Felix follows up on this, saying:
Itâ€™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 â€œhomevoter hypothesisâ€ advanced by William Fischel (2001). Asserting a close connection between homeownership and civic engagement (hence the term â€œhomevoterâ€), 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 efï¬cient public policies and projectsâ€”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 homesâ€”in much the same way that a corporationâ€™s shareholders will support private projects that have a positive net present value for the ï¬rm.
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.