Jeffrey M. Lacker

English

Research Papers in Economics

A
s the cover story of this
issue of Region Focus makes
clear, affordable housing
is a significant problem for many
Americans. There are several rea-
sons for the mismatch between
consumer demand on the one
hand and market supply on the
other. In particular, land-use 
regulations appear to be an 
important factor driving up prices
in some of the Fifth District’s
highest growth regions. Policymakers should consider the
costs such regulations impose on society before enacting or   
expanding these rules.
Reconsideration may also be worthwhile for the domi-
nant policy response to shortages of affordable housing. In
general, governments have preferred to subsidize the con-
sumption of housing in various ways rather than to provide
cash transfers to support the incomes of those most hurt by
high housing costs. But it’s not clear that this approach is a
particularly efficient means of helping such consumers. It
may have induced them to obtain more housing and less of
other goods than they would have in the absence of such
subsidies. Providing people with cash transfers, in contrast,
would be a more direct solution to the problem and would
let them choose how best to allocate their resources. It is a
well-established economic principle that the provision of
cash or cashlike assistance is the most cost-effective way to
improve the well-being of low-income households. There is 
really nothing special or different about housing that sug-
gests that deviation from this principle is warranted.
So if cash transfers would be a more desirable policy re-
sponse, why do we subsidize housing instead? One reason
— associated specifically with homeownership — may be the
supposed “positive externalities” associated with ownership.
Many believe that benefits accrue not just to the home-
owners but to the larger community as well. For instance,
several studies have suggested that homeowners tend to be
more active in their communities, by participating in char-
itable, social, and political groups at relatively high rates.
Others have claimed that homeowners tend to lead health-
ier, happier lives, thus reducing total public expenditures on
medical care. And, finally, some have argued that home-
owners generally take better care of housing than do renters,
contributing to more pleasant, stable neighborhoods.
The last argument seems consistent with economic 
theory. We would generally expect owners to maintain things
better than people who are just temporary stewards of the
property. And insofar as landlords often have difficulty 
assessing the character of prospective renters or monitor-
ing their behavior once they have moved in, we might 
expect that rental properties will receive less care from their
occupants. 
The other examples of positive externalities discussed
above may have causation problems, however. Community
activism and personal health could be associated with home-
ownership but not a result of it. We know that, on average,
homeowners tend to be wealthier than renters. But we also
know that wealthier people tend to be more active in their
communities as well as healthier than those near the 
bottom of the income distribution. Which factor — home-
ownership or wealth, or even some other, unobserved 
factor that is correlated with both of these — is driving 
higher rates of community activism and health? It’s not 
obvious.
In addition, there may be social costs associated with
homeownership, especially for low-income people. Home-
ownership often makes it more difficult for people to move
from one place to another — mobility that might be espe-
cially valuable to those in search of better jobs. Renting may
make it easier for them to relocate for a position that more
closely suits their skills. Also, low-income households have
more difficulty weathering sudden drops in income and large
unexpected expenditures, which could lead to foreclosure.
As William Rohe, Shannon Van Zandt, and George McCarthy
of the University of North Carolina’s Center for Urban and
Regional Studies have noted, “While breaking a lease on a
rental unit is problematic, the stress and trauma caused by
defaulting on a mortgage is much more serious.”
Overall, then, I think we should be cautious about pur-
suing policies that aim to increase homeownership. For some
people, owning a home is clearly a good decision, which will
benefit them and their neighbors. But for other people, 
renting may make more sense — again, for both the renters
and society generally. I don’t see a strong reason to tilt the
playing field in favor of one choice or the other, especially
when the public benefits and costs of encouraging home-
ownership are so uncertain.
NOTEW ORTHY
Encouraging Homeownership — at What Cost?
Spring 2005 • Region Focus 1
JEFFREY M. LACKER
PRESIDENT
FEDERAL RESERVE BANK OF RICHMOND
Region Focus Spring 2005 v.6.ps - 4/25/2005 13:11 PM

Noteworthy : Encouraging homeownership - at what cost?

http://www.richmondfed.org/publications/research/region_focus/2005/spring/pdf/noteworthy.pdf

Noteworthy : Encouraging homeownership - at what cost?

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