Friday, May 8, 2009

Home-Ownership as an Institution

Housing is a factor that is often cited as contributing to the current downturn. And because housing is not an isolated sector of the economy, there are a myriad of reasons given for the collapse of the housing sector, from monetary policy to unscrupulous brokers to misinformed investors and uninformed home-buyers.

There are numerous examples of how people in various roles made choices based on incentives they had to act. But how did the incentives get there? Some would have us believe it was a lack of oversight or regulation that allowed incentives to run amok. Others would have us believe that specific incentives put in place by various interested or well-intentioned parties created opportunities for misguided decisions.

But there has not been a lot written about the fundamental idea of home-ownership and how it has impacted choices. We know people respond to incentives. And we know the institutions developed within a system shape the incentives. But we often overlook the history of the institutions. And while the definitive history of home ownership in American society may yet be written, this article from City Journal (HT to Arts & Letters Daily) is a decent start.

The author delves into early 20th-century attempts by the government to increase home ownership and carries through that century to the current situation. For each example, the case is made that legislation reflected a desire to formalize an informal belief - that homeownership was a socially desirable outcome. The idea that homeownership is a desirable outcome is common within our teaching. We tell our students governments provide tax deductions for homeownership, either through mortgage interest or property tax deductions, because owners are "more involved" in their communities. That owners care for property differently than renters. And those owners do things to increase the value of the property, positively impacting the value of other property.

The last few pages get a bit too political for my taste. But this article, while longer than some normally suggested here, is worth your time - whether you are an economics or American History teacher. Either way, I think you will gain insights to share with your students.

I look forward to your comments.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.

3. All choices have consequences.
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

1 comment:

Julia said...

Great article. Recently I wrote a short paper for a class regarding housing and the financial and economic crisis. I suggested the experience of this crisis may cause a social change--homeownership may not continue as the American Dream. Certainly now, homeownership and the housing market are preventing mobility towards areas where there are better job opportunities.