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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