Homeownership and positive externalities

By Felix Salmon
June 14, 2010

My post on falling homeownership sparked an interesting debate about whether and where one might find positive externalities associated with people owning their homes. Certainly a lot of old-fashioned home-improvement expenditures, which make sense insofar as they increase the value of the home, stop making sense when any increase in value just goes straight to the bank. But are there other areas in which homeowners impose more positive externalities than renters?

DanHess, in the comments to my post, says that some investments make sense just on a cashflow basis, and therefore could sensibly be implemented even by someone underwater on their mortgage:

I have found that many things I have done on my home were discretionary, from the kitchen to bathrooms. New energy efficient windows, attic insulation, an attic fan, ceiling fans, and high efficiency appliances are all examples of investments I made which are each realizing a 10% or greater real return for the lifetime of the investment because of utility savings. In each case, I have been able to see the savings appear. That insulation will be just fine 50 years from now. None of these investments are available to renters.

And Matt DeBord, of TBM’s Shifting Gears blog, shared by email his own experience in LA. He’s helped create a dual-language immersion program at a nearby grade school, now headed into year 3, and he’s going out of his way to support locally-owned businesses, rather than big national chains. Those aren’t the kind of things that he did when he was renting downtown.

Are these not the kind of things that renters in his neighborhood do as well? Well, they might be, if his neighborhood had much in the way of renters, which it doesn’t. And insofar as it does have rental properties, they tend to be much less nice than the homes which are owner-occupied. In areas like downtown with nice rental properties, renters can end up with more disposable income (since renting is still cheaper than buying), but it doesn’t benefit the neighborhood in the same way, since the neighborhood is more dominated by national chains, and there’s less effort put in to supporting local schools.

For me, it’s important to distinguish between two things which are separate, if highly correlated: homeownership, on the one hand, and the amount of time that you expect to stay in your home, on the other. A lot of the rhetoric about the upside of homeownership elides these two things; and for a long time doing so made perfect sense. After all, someone with a 30-year mortgage is likely to stay put for much longer than someone with a 1-year lease.

But during and after the housing bubble, that changed. Buyers were encouraged to “Flip this House“, and then, when they ended up underwater or when their teaser mortgage ended, resigned themselves to losing their home. Anecdotally, friends of mine who were planning to have babies were buying apartments which were not remotely suited to raising a family, intending to sell at a profit when the baby arrived: the ownership time horizon shrank a lot, during the bubble, and I don’t think that it has grown much if at all since.

Meanwhile, in a world where landlords have no ability to raise rents significantly for the foreseeable future, renters can feel a lot safer in their homes than they have in years. Many people who have learned the lesson of the housing bubble are now happy to rent in perpetuity — and that doesn’t mean moving house on a regular basis.

So it seems to me that owners, with shortening time horizons, are less likely now to do things like install high-efficiency appliances and invest time and effort into their local schools, while renters, with lengthening time horizons, are more likely to. Probably homeowners still score higher on the positive-externality front than renters do, but the difference is narrowing.

Matthew DeBord isn’t so sure. “Limited evidence on my front suggests that those getting out from under negative equity stay in the hood, rent, and continue to build the area,” he writes. “They’re already vets of commitment.” That makes sense: you go to the more-expensive local hardware store because doing so pays off over time, once you’ve built up a relationship there. And once you have that relationship, then you don’t need to lose it just because you lose your house.

My feeling is that a lot of what we’re seeing is related to rental properties generally being designed for and marketed to the childless, while families, who tend to stay put if only to give the kids continuity, are more likely to own and to build up real local communities. Parent-teacher meetings are a great way of getting to know your neighbors. But if and when families start to rent nice places, they’re just as likely to build strong communities as those who own. It’s not homeownership that creates the positive externalities, so much as simply intending to stay where you are for a while.

Update: There’s nothing like empirical data to destroy a blog thesis! Adam Ozimek compares rental tenures in 2004 and 2008, and finds no evidence that renters are staying in their homes any longer.

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Comments
9 comments so far

One of the consequences of rent control in NYC is that a lot of renters have a lot of “equity” in their apartments that they can’t even get by selling — if they move, they simply lose it. Insofar as the effect is one of permanence in a community, the relationship should be very different in NYC, at least in rent-controlled housing, than in the rest of the US.

Posted by dWj | Report as abusive

Felix,

Amen! If you think about these kinds of home or local improvements in terms of amortizing the cost to you (the renter), it makes much more sense to make the investments if you know you have a long timeline.

As someone who would like to commit to a much longer lease than my landlord is willing to offer, I can tell testify to the negative impact that treating rentals as a short-term investment can create. I would be making much bigger investments in my home – improving the yard, personalizing the inside, getting more involved in the neighbourhood – if I wasn’t worried about losing all that investment in a year’s time, and having to absorb the cost of undoing it at the end of the lease, for only a year’s benefit to me.

I would think that there’s a *huge* investment opportunity here using something like of the American Home Ownership group that you mentioned a few weeks ago: keep people in their homes, as long-term renters (with all the positive externalities that would bring), and get investment properties at a relative bargain since the cashflow is partly subsidized by the tenants.

Posted by voodoobunny | Report as abusive

Putting aside particulars, there’s not much point in paying attention to positive externalities if people dramatically overvalue homeownership for other reasons. Tax breaks and cultural bias more than compensate for the externalities mentioned above. (Those investments in energy efficiency are further subsidized as well!)

Posted by absinthe | Report as abusive

I hadn’t thought about it in these terms before – but this is true for my wife and I. We have rented in a neighborhood we like very much for ~3 years and hope to buy in the area when things return to more reasonable price levels. In the mean time we have moved most of our savings to a local bank and try to choose local businesses in a conscious effort to help our community.

Posted by grumblecakes | Report as abusive

We need some comments on the European approaches, which encourage long-term renting by law and by custom. Felix, didn’t you write about German rent-to-own, government-supervised contracts?

Posted by walt9316 | Report as abusive

Felix, you write “it’s important to distinguish between two things which are separate, if highly correlated: homeownership, on the one hand, and the amount of time that you expect to stay in your home, on the other.” Great idea! Why not follow your own advice and clearly distinguish between “homeowners” and “homeflippers”.

* Over the long run, owning your home is (in most markets) cheaper than renting. The switchover point in cash flow is generally between the fifth and the tenth year. And of course, some of that cash flow ends up as equity.

* Homeownership is a low-risk financial strategy, greatly reducing your income needs in retirement. In theory you might earn sufficiently great returns on that same equity to pay for your rent in retirement, but that assumes stock-market returns that in my opinion are optimistic.

* Homeownership allows you to customize your home to your individual needs. I like to garden (and gardens take three to five years before they even begin to mature), so the years we spent renting were horribly depressing.

Homeflippers are speculating fools. We all know that, so you can stop railing against them. But if your housing needs will be constant for the next ten years, buying (in most markets at most times) makes more sense than renting.

Rent control changes the picture dramatically, but very few places have rent control. One of the places we lived as renters jacked up the rent 30% over three years! In contrast, our cost of ownership has steadily fallen over the last decade.

Posted by TFF | Report as abusive

It’s always funny when Felix says things like, “[paying for home improvements]… stops making sense when any increase in value just goes straight to the bank.” He always forgets that people deliberately improve the home to live amongst the improvements! His citing “Flip that House” is a dodge; very few people were ever flippers.

The increase in value is enjoyed by the person who made her home more livable by, say, adding a bath to decrease family misery or building a nice kitchen that can fit her extended family at a child’s birthday party.

Home purchase and improvement can always be seen as a stupid investment if you forget there’s someone who lives in the place and wants to love it.

Please see the Cary Grant movie “Mr. Blandings Builds His Dream House” to see that none of these arguments are new.

Posted by pantaloni | Report as abusive

Government subsidies are always taken advantage of by those for whom they were not intended. Most of those have backfired, except the rich who have the same tax incentives. The subsidies were supposed to bring the peace and stability to families.

Ok that’s the negative side but really there is no peace like having a home, so it is sad it didn’t work as intended. I hope there are lessons learned. Besides the major things already mentioned, there are the nuances of homeownership which will be evident over time.

I think that a person who is looking for stability and a family setting like their parents might be more inclined to want and to buy a house. That is the type of person who would also wish to care for it and make it last.

I have owned several houses, the first one was when I was 23 and single. The happiness I have had being a homeowner has rippled through the communities I have owned in for over 30 years. I have also burned 2 mortgages whilst many friends never attempted to own their own home and many still rent. They are not involved in their communities, whereas i volunteer for many organizations as I feel a part of the community and benefit from the involvement as well.

I would think the health benefits of being able to make your home and yard as you wish it to be, not having to worry about pets, paint colour and nicks in the wall are a benefit healthwise and thus economical in the long run for healthcare costs. (although I am from Canada, there are always benefits to having a healthy community)

As the previous poster said, having a garden, flowers to cut, and in my case 2 apple trees are good for the health, great excercise and of course eases the pocket book at the grocery store. I have 4 composters so I am greener and that means less landfill.

It also makes for good and happy neighbours as they get apples, pies, sauces, produce, jam, salsa and often soil. (ok that ‘s a tiny externality but one which happens many times in a year and those benefits will add up and have a ripple effect)

Homeowners are more likely to participate in Neighbourhood Watch, School Patrols, Community events, community cleanup, patrolling, and resident groups. They are more likely to protect the property that belongs to them and more likely to help their neighbour in that attached way neighbours can and do. A safer home and community bring many benefits to all and keep property values more stable.

I know most of my neighbours but have to say I do not know any of the renters in the 2 condos or the apartments. I do not see any of them at the community events; none are on the board, and none attend the free picnic which our residents group puts on … as they do not feel that same sense of community.

Posted by hsvkitty | Report as abusive

Felix, there are a few “positive externalities” that you forgot to mention: first, while your main focus the economic are very important, they may not be the most significant. As for the economic, you will find from almost all studies of CLT/Affordable housing programs, that their new home owners are much MORE likely to stay current on their mortgage payments, and ALL their other debts. More so than other owners and almost all renters.

But, was is also significant is that new home owners also tend to have less divorces and commit fewer crimes. More important, if they have kids, the kids also commit fewer crimes, do better in school, get more higher education degrees, attend churches and play more community sports.

Not all of course, just as not all crack producers own their crack houses. Please note, most owners of crack houses do not stay long enough to pay off their 30 yr loans.

But, a LOT more new home owners, especially with children, do much better in life & society, by all of {y}our Judeo-Christian family values.

Posted by JGBell | Report as abusive
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