A majority of American adults live in owner occupied housing. As an economist, I celebrate the logic of revealed preference. While many poor people are renters, many non-poor people reveal that the benefits of ownership exceed the costs. In this entry, I would like to delve into the details here. Up front, let me say that I don’t want to discuss the tax code and the nitty gritty of mortgage interest deductions, the GSEs, etc. Instead, I want to talk about why people gain life satisfaction from ownership and what are some of the hidden costs of ownership under our current “rules of the game”. As an urban economist, I want to contrast the private benefits to an adult of owning a home and the local social benefits conveyed to a community when it consists of home owners. Portfolio Risk from Home Ownership Let’s start with a personal example. Back in 2000, We purchased a home in Belmont, MA (a Boston suburb), we paid 1/2 in cash and got a loan for the rest. The cash we invested in the home had a next best alternative. We could have invested in a diversified portfolio of assets rather than making a place based bet. By buying this home, we were raising our migration costs for moving away from Boston and thus were losing some option value if the local economy performed worse than the rest of the nation. A strange feature of the housing market is that owners hold an undiversified portfolio. Imagine an alternative world where I could own 36% of my Belmont home and own 2% of 32 other homes scattered around the United States. This would be a more diversified portfolio. Of course there would be contracting issues in designing this contract. My friend and co-author Joe Tracy co-authored a MIT Press book on implementing these contracts. The Past Rate of Return on Housing for African-Americans In 2021, I released an NBER Working Paper where I use several data sets to make a simple point. Here is my paper’ abstract: “The racial and ethnic composition of home buyers varies across geographic locations. For example, Asians and Hispanics are much more likely to buy homes in California than Blacks and Blacks are more likely to buy homes in Georgia than other demographic groups. Home prices grow at different rates across geographic units such as counties or zip codes. Hedonic bundling inhibits buyers from purchasing shares of different homes and forming a spatially diversified housing portfolio. Spatial variation in purchases suggests that the average rate of return to housing varies across racial and ethnic groups. To test this claim, I construct a geographic shift-share index by combining Zillow geographic specific home price index data with HMDA micro data. The shift share calculations yield the average rate of return to home ownership by purchase year, and sale year for different demographic groups. Over the years 2007 to 2020, Blacks earned a lower rate of return on home purchases than Asians and Hispanics and the sample average. Within geographic areas, average loan differences across racial and ethnic groups are very small.” Let’s unpack this. Over the last 25 years, cities such as San Francisco, Boston, Portland, Seattle, San Jose, Malibu, and Santa Monica have boomed. None of these cities is known to be an African-American city. African-Americans tend to buy in other cities such as Baltimore, Cleveland and Detroit. What is going on here? (and of course I am telling an Average story —- LeBron James lives close to me in Los Angeles’s Brentwood). African-Americans on average have lower wealth than Whites and are less likely to be able to afford the down payment to buy housing in Superstar Cities. African-Americans are less likely to work in Tech than Whites and Asians and this reduces the likelihood that they are living in the major tech hubs. In the areas where African-Americans have ties, house prices have not appreciated much and this means that the AVERAGE African-American homeowner has earned a lower rate of return on housing over the last 25 years. Going forward (from 2023 to 2040) will Baltimore’s housing market outperform San Jose’s? This is possible. In my recent WFH Going Remote book, I present microeconomic arguments for why this is possible if Baltimore improves its quality of life. In closing this section, I want my readers thinking about opportunity cost. If an African-American family owns housing in Baltimore then that money is not invested in the SP500 stock market index. Opportunity cost for asset investments always exist. What About the Consumption Value of Home Ownership? When we teach Econ 101, we introduce our students to the utility function. This is the economist’s “thermometer” measuring how much pleasure we gain from different consumption bundles such as consuming beer or pizza. The consumer knows herself and knows her budget constraint and makes the right (affordable) consumption choice. Assuming people are consistent over time, we learn about their priorities from the choices they make as market prices and their income changes. With this preamble, why does home ownership raise one’s utility? One hypothesis is “pride of ownership”. But what do these words mean? Economists have struggled with modeling the demand for “status”. Economists have taken Veblen seriously and have sought tests of which subgroups of people seek to own and display luxury goods to signal that they are special. Here is a paper about cars and jewelry ownership. Of course, I understand the desire for status. I continue to submit papers to Top 5 journals and to track my Twitter Follower count! But, the point of this 1/2 joke is that there is an ever increasing number of strategies for producing “status”. As I age, I gain pride by reaching my Google Fit target of 10,000 steps a day. During my life time, I have lived in fancy rental housing in Manhattan, Singapore, and Baltimore. Given the changing demographics of our population, real estate suppliers will offer rental properties if there is demand. Don’t Renters Face Displacement Risk and Gentrification Risk? Yes, but if this is a serious concern then renters can sign longer term contracts up front. Scottie Pippen signed a 10 year contract with the Chicago Bulls at the start of his career because of his fear of injury. In a renter economy, there would be less support for local NIMBYism and real estate developers would build more housing and this would reduce rent rise risk. The ongoing conversion of commercial urban real estate into residential housing also reduces the likelihood of medium term rent spikes. I claim that it is time to visit this important paper by Todd and Nick. Sinai, Todd, and Nicholas S. Souleles. "Owner-occupied housing as a hedge against rent risk." The Quarterly Journal of Economics 120, no. 2 (2005): 763-789. Neighborhood Social Capital Boosts Due to Home Ownership? Ed Glaeser and Denise DiPasquale have posited a positive spillover that when real estate is owner occupied that the owner has the right incentives to maintain the property (to maintain the resale value) and to not free-ride in terms of neighborhood attributes such as safety and neighborhood greenness. Their empirical strategy in their applied research was to use panel data at the individual level and observe how the same person behaves before and after she becomes a home owner. A field experiment researcher would want to go a step further and randomly assign similar people at the baseline to renting versus owning and then observe how their home is treated and how their neighborhood’s quality of life changes over time. I greatly admire their work here but I want to be provocative and argue that their work is out of date due to technological change. I want to return to a paper by Baker, George P., and Thomas N. Hubbard. "Contractibility and asset ownership: On-board computers and governance in US trucking." The Quarterly Journal of Economics 119, no. 4 (2004): 1443-1479. These authors tell the following story. Back in the 1970s, truck drivers bringing stuff from California to Baltimore markets had private information about their routes and effort. The food company gave the truck driver a share of the profits to incentivize them to not shirk with respect to effort. The advent of cheap GPS computers meant that the food company could easily monitor the trucker and could now pay him a fixed wage. The same idea holds in 2023 for rental housing. The big data monitor era allows the property manager to have a very good sense of how the tenant is using the property and what is going on in the local neighborhood. If crime rises, the property manager can hire private guards. If litter increases, a crew can be hired to pick up the trash. Markets substitute for social capital and volunteering! Conclusion The modern Economy’s Big Data revolution and climate change risk both create incentives for more of us to be renters. Going forward if more of us are renters in the year 2040; then we gain the following adaptation benefits; #1; Our assets are less exposed to place based shocks (i.e Hurricane Ian), #2 we hold a real option to move away from areas that turn out to be at greater risk from shocks, #3 There is less lobbying for place based subsidies using national subsidies because “victims” have fewer place based assets at risk (i.e we are each holding a more diversified portfolio). If government steps back from insurance markets, the private sector will step up its game and insurance innovation will further spur the pace of climate change adaptation. If these ideas interest you, read my 2021 Yale Press book Adapting to Climate Change.
My "Migration" to Substack
My "Migration" to Substack
How Will Houston Adapt to the High Heat?
The New Economic Geography of WFH
Homeownership Revisited: An Economist's Perspective
Homeownership Revisited: An Economist's Perspective
Understanding the Arguments Made by Climate Change Adaptation Pessimists: Part One
Understanding the Arguments Made by Climate Change Adaptation Pessimists: Part One
The Interesting Economics Related to the Marginal Cost of Avoiding Heat Exposure
The Interesting Economics Related to the Marginal Cost of Avoiding Heat Exposure
"The Water Cooler" and Spontaneous Face to Face Interaction in a Hybrid-WFH Economy
"The Water Cooler" and Spontaneous Face to Face Interaction in a Hybrid-WFH Economy
How Will the Rise of WFH Help Us to Adapt to Climate Change?
How Will the Rise of WFH Help Us to Adapt to Climate Change?
USC Economics Faculty Hiring Since 2015
USC Economics Faculty Hiring Since 2015
The New New Geography of Jobs
The New New Geography of Jobs
Connecting the Dots: The Common Themes Between My Three Recent Books
Connecting the Dots: The Common Themes Between My Three Recent Books
The Simple Microeconomics of Adapting to Real Estate Damage Caused by Flooding
The Simple Microeconomics of Adapting to Real Estate Damage Caused by Flooding
The Role of Qualitative Data in Academic Field Experiment Research
The Role of Qualitative Data in Academic Field Experiment Research
My Growing Set of Podcasts Discussing my April 2022 Going Remote book
My Growing Set of Podcasts Discussing my April 2022 Going Remote book
Marketing My Four Amazon Economics E-Books that Sell for $1 Each
Marketing My Four Amazon Economics E-Books that Sell for $1 Each
The Consequences of Banks Pursuing a "Double Bottom Line" as the Federal Reserve Prioritizes Climate Change Risks
The Consequences of Banks Pursuing a "Double Bottom Line" as the Federal Reserve Prioritizes Climate Change Risks
Applied Game Theory and the Medium Term Reputation Gains from the Recent China-USA Trade War
Applied Game Theory and the Medium Term Reputation Gains from the Recent China-USA Trade War
How Do We Nudge "Behavioral" Decision Makers to Adapt to Emerging Climate Risks?
How Do We Nudge "Behavioral" Decision Makers to Adapt to Emerging Climate Risks?
The Economic Consequences of Youth Pessimism About Climate Risk: Lessons from Slemrod's "Savings and the Fear of Nuclear War"
The Economic Consequences of Youth Pessimism About Climate Risk: Lessons from Slemrod's "Savings and the Fear of Nuclear War"
What Insights Does Economics Offer About the Nascent Biden Administration Transport Infrastructure Investment Program?
What Insights Does Economics Offer About the Nascent Biden Administration Transport Infrastructure Investment Program?
Contrasting Adapting to Contagious Disease Risk with Adapting to Climate Change
Contrasting Adapting to Contagious Disease Risk with Adapting to Climate Change
Will the Biden Administration's Trillion Dollar Investment in Infrastructure Unlock the Potential of Post-Industrial Cities?
Infrastructure Investment Microeconomics
Infrastructure Investment Microeconomics
A Beach Haiku
Incorporating Local Public Health Dynamics into The Rosen/Roback Spatial Equilibrium Model
Incorporating Local Public Health Dynamics into The Rosen/Roback Spatial Equilibrium Model
Adverse Selection in Car Insurance Markets: What Happens When Car Sellers Offer Insurance to Good Drivers?
Adverse Selection in Car Insurance Markets: What Happens When Car Sellers Offer Insurance to Good Drivers?
Spatial Equilibrium and Haitian Immigration to the U.S
Spatial Equilibrium and Haitian Immigration to the U.S
Some Microeconomics of Extreme Heat Exposure in the United States
Some Microeconomics of Extreme Heat Exposure in the United States
Amazon's Big Data on Consumer Behavior Fuels its Entry into Urban Retailing
Amazon's Big Data on Consumer Behavior Fuels its Entry into Urban Retailing
What Does the Movie "Dirty Harry" Teach Us About Adapting to Climate Change Risk?
How Can the Insurance Industry Accelerate Climate Change Adaptation?
How Can the Insurance Industry Accelerate Climate Change Adaptation?
Ranking Academic Economics Power Couples Based on July 2021 REPEC Data
Ranking Academic Economics Power Couples Based on July 2021 REPEC Data
Academic Economist Productivity Rankings
Academic Economist Productivity Rankings
Stiglitz Versus Cochrane: What Are the Non-Market Quality of Life Impacts of Climate Change?
Stiglitz Versus Cochrane: What Are the Non-Market Quality of Life Impacts of Climate Change?
Some Microeconomics of Adapting to Wildfires in the American West Framed as a Gary Becker Problem Set Question
Some Microeconomics of Adapting to Wildfires in the American West Framed as a Gary Becker Problem Set Question
A Few Thoughts About Economic Growth as a Climate Change Adaptation Strategy
A Few Thoughts About Economic Growth as a Climate Change Adaptation Strategy
Climate Change Bets and Julian Simon versus Paul Ehrlich Again
Climate Change Bets and Julian Simon versus Paul Ehrlich Again
Cliff Winston's New Book Gaining Ground
Cliff Winston's New Book Gaining Ground
A Self Evaluation of My Two Years Directing the Johns Hopkins 21st Century Cities Initiative
A Self Evaluation of My Two Years Directing the Johns Hopkins 21st Century Cities Initiative
The Emerging New Economic Geography of the United States
The Emerging New Economic Geography of the United States
How Does Applied Microeconomic Research Accelerate Climate Change Adaptation?
How Does Applied Microeconomic Research Accelerate Climate Change Adaptation?
Do The Urban Poor Gain from Local Economic Growth?
Do The Urban Poor Gain from Local Economic Growth?
Why is Beautiful California Losing Congressional Seats? Constrained Local Housing Supply Influences National Politics
Why is Beautiful California Losing Congressional Seats? Constrained Local Housing Supply Influences National Politics
Unlocking the Potential of our "Unlocking the Potential of Post-Industrial Cities" Book
Unlocking the Potential of our "Unlocking the Potential of Post-Industrial Cities" Book
Why Climate Economics Continues to Succeed
Why Climate Economics Continues to Succeed
The Microeconomics of Enhancing the Effectiveness of Government Spending $2 Trillion Dollars on Infrastructure
The Microeconomics of Enhancing the Effectiveness of Government Spending $2 Trillion Dollars on Infrastructure
The Revealed Preference of Porch Pirates
The Revealed Preference of Porch Pirates
The Great Climate Change Race Between The Rising Threat and Our Increasing Ability to "Take a Punch"
The Great Climate Change Race Between The Rising Threat and Our Increasing Ability to "Take a Punch"
Understanding the High Cost of Military Drone Use Using a Rebound Effect Model
Understanding the High Cost of Military Drone Use Using a Rebound Effect Model
The Resurgent Consumer City by Fall 2021
Some Urban and Environmental Economics Links
Free Copies of a New Urban Economics Book: Unlocking the Potential of Post-Industrial Cities
Free Copies of a New Urban Economics Book: Unlocking the Potential of Post-Industrial Cities
Climate Change Adaptation Lessons from Freezing Texas
Unlocking the Potential of Post-Industrial Cities
The Revealed Preference Approach for Learning Microeconomics
Backwards Induction and the Demise of U.S Gas Stations in the Year 2045
Backwards Induction and the Demise of U.S Gas Stations in the Year 2045
Platform Competition and the Urban Economics of Free Speech
Platform Competition and the Urban Economics of Free Speech
How Can the Biden Administration Boost Quality of Life in Post-Industrial Cities Such as Baltimore?
How Can the Biden Administration Boost Quality of Life in Post-Industrial Cities Such as Baltimore?
Some Rust Belt Urban Economics
Free Environmental Economics Lecture Notes and Exam Questions and Access to a High Quality $8 E-book Textbook
Free Environmental Economics Lecture Notes and Exam Questions and Access to a High Quality $8 E-book Textbook
Veblen and Conspicuous Consumption Revisited: The Beneficial Role of "Invisible" Masks During a Pandemic
Veblen and Conspicuous Consumption Revisited: The Beneficial Role of "Invisible" Masks During a Pandemic
The Economics of Personal Responsibility and Human Development
The Economics of Personal Responsibility and Human Development
Will President Biden's Low Carbon Policy Efforts be Slowed Down by the Gruenspecht Effect and Slow Economic Growth?
Will President Biden's Low Carbon Policy Efforts be Slowed Down by the Gruenspecht Effect and Slow Economic Growth?
Will the Rise of Work from Home Lower Uber's Medium Term Profits?
Will the Rise of Work from Home Lower Uber's Medium Term Profits?
Some Research Notes on Using Geo-Tagged Cell Phone Data to Study Urban Economics Questions
Some Research Notes on Using Geo-Tagged Cell Phone Data to Study Urban Economics Questions
In the Year 2030, How Will Applied Microeconomists Study the Consequences of the 2020 COVID Shock?
In the Year 2030, How Will Applied Microeconomists Study the Consequences of the 2020 COVID Shock?
The Microeconomics of the Rise of Green Buildings and Climate Change Adaptation: A California Example
Using the Supply and Demand Model to Understand China's Recent Electricity and Coal Shortage
Using the Supply and Demand Model to Understand China's Recent Electricity and Coal Shortage
Competition in the Non-Profit "Green" Sector or the Industrial Organization of Non-Profits
Competition in the Non-Profit "Green" Sector or the Industrial Organization of Non-Profits
Why Does JHU's Twenty First Century Cities Initiative Focus on Urban Economic Growth?
Productivity and Climate Change Adaptation in a Spatial Economy
Productivity and Climate Change Adaptation in a Spatial Economy
Climate Change Adaptation in a Spatial Economy
Climate Change Adaptation for Urban Indian Slum Dwellers: A New Economics Research Agenda
Climate Change Adaptation for Urban Indian Slum Dwellers: A New Economics Research Agenda
My Next Steps in Working on Climate Change Adaptation Microeconomics
My Next Steps in Working on Climate Change Adaptation Microeconomics
The Lulling Effect and the Upcoming COVID19 Vaccine
The Lulling Effect and the Upcoming COVID19 Vaccine
Announcing the Formation of Climate Economics: A New Climate Resilience Consulting Firm
Pandemic Microeconomics Revisited: The Incentive Effects of Liability Shields for Contagion Risk
Pandemic Microeconomics Revisited: The Incentive Effects of Liability Shields for Contagion Risk
Clean Air as an Experience Good in Urban China
Clean Air as an Experience Good in Urban China
The Social Benefits of Social Capital in Fire Fighting Units Contrasted with the Social Cost of Social Capital in Police Units
The Social Benefits of Social Capital in Fire Fighting Units Contrasted with the Social Cost of Social Capital in Police Units
Some Thoughts on the 2019 JEL Review of My Co-Authored China Book
Some Thoughts on the 2019 JEL Review of My Co-Authored China Book
Al Pacino's Serpico and the Economics of Rotten Apples and the Missing Data Problem.
Al Pacino's Serpico and the Economics of Rotten Apples and the Missing Data Problem.
Peer Monitoring and the Urban Police: Lessons from the Microeconomics of Microfinance
Peer Monitoring and the Urban Police: Lessons from the Microeconomics of Microfinance
The Urban Economics of Big City Mayors
The Urban Economics of Big City Mayors
Private Nursing Homes, Product Differentiation and Reducing COVID-19 Contagion Risk
Private Nursing Homes, Product Differentiation and Reducing COVID-19 Contagion Risk
Will COVID-19 Reduce Smoking Rates Today and Thus Reduce Future Cancer Risk?
Will COVID-19 Reduce Smoking Rates Today and Thus Reduce Future Cancer Risk?
Real Estate Windfalls from Delaying the Fall 2020 Semester
Real Estate Windfalls from Delaying the Fall 2020 Semester
Open Source Collaboration versus Winning the Race for Receiving a COVID-19 Vaccine Patent
Open Source Collaboration versus Winning the Race for Receiving a COVID-19 Vaccine Patent
Will the COVID-19 Induced Ballooning Budget Deficit Lead to More Efficient Taxation?
Will the COVID-19 Induced Ballooning Budget Deficit Lead to More Efficient Taxation?
Larger Firms Have an Adaptation Advantage in Coping with Ongoing COVID-19 Infection Risk
Larger Firms Have an Adaptation Advantage in Coping with Ongoing COVID-19 Infection Risk
Has the Profitability of Selling Car Insurance Increased in Early 2020 Due to COVID-19?
Has the Profitability of Selling Car Insurance Increased in Early 2020 Due to COVID-19?
Will Richer People Further Increase their Social Distancing in Post COVID-19 Urban Life?
Will Richer People Further Increase their Social Distancing in Post COVID-19 Urban Life?
Low Carbon Suburban Living in 2021 in our "Post-COVID19" World
Low Carbon Suburban Living in 2021 in our "Post-COVID19" World
Do Social Networks Increase or Decrease the COVID-19 Contagion Rate?
Do Social Networks Increase or Decrease the COVID-19 Contagion Rate?
An Open Source Clinical Trial of Coronavirus Vaccines
An Open Source Clinical Trial of Coronavirus Vaccines
Measuring the Medium Run Productivity Costs of the Coronavirus Recessions
Measuring the Medium Run Productivity Costs of the Coronavirus Recessions
Will the Fear of the Coronavirus Reduce Baltimore's Long Term Murder Rate?
Will the Fear of the Coronavirus Reduce Baltimore's Long Term Murder Rate?
The Urban and Environmental Economics of Voluntary Social Distancing
The Urban and Environmental Economics of Voluntary Social Distancing
Why Did Wuhan’s Officials Respond Slowly to the Spread of the Coronavirus?
Why Did Wuhan’s Officials Respond Slowly to the Spread of the Coronavirus?
Should the City of Baltimore Issue More Municipal Debt?
Should the City of Baltimore Issue More Municipal Debt?
Does the Coronavirus Offer a Test of the Rare Disasters Asset Pricing Model?
Does the Coronavirus Offer a Test of the Rare Disasters Asset Pricing Model?
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My Research and My Books
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