Home Ownership Alternatives

There have been a few posts at Atlantic Cities considering the "forever renter".  The subprime crisis has caused a major reevaluation of the risks of home ownership.  In a world where housing prices are not guaranteed to go up forever, does it make sense to leverage yourself so heavily on a single investment?  If stable "organization man" careers are replaced by constant change, does it make sense to tie yourself down to one location?

While it would seem the new economic reality is stacked against homeownership, there are still some non-economic downsides to a life of renting.  Emily Badger writes about a few of these concerns, explaining the non-economic indignities that renters suffer.  There is a psychological toll to not being able to paint the walls or hang paintings on nails, and a huge psychological benefit from the feeling of owning the space where you live.

I think it's important to distinguish between the economic and psychological side of home ownership vs renting. Some of the comments explain alternative agreements between landlord and tenant, which is a completely non-economic consideration.  It's interesting to think about how much of the landlord/tenant relationship is culturally determined, and how this can mitigate the feeling of missing out on home ownership.

There are separate economic considerations however.  Home ownership is partially an investment, and since a house by itself is technically a depreciating asset, the investment is in the neighborhood.  Home owners benefit from an improving neighborhood, while renters get priced out.  Home owners care about maintaining their neighborhood and are incentivised to become active citizens, while renters would experience any positive changes as rent increases.

I've considered this situation before, and have always wondered why housing as an investment can't be decoupled from your home.  I've thought of a few plausible alternatives to the standard model of home ownership we have in place today.

Home Ownership as a Completely Flexible Share-based Equity Investment

If I would like to invest in my neighborhood, why is my only option to leverage myself and buy a house?  Amanda Erickson writes about NYU professor Andrew Caplin's idea of housing partnerships, which I believe partially touches on this idea.  In my opinion he still seems to frame his idea as a way to invest in a fraction of YOUR home, along with the help of an institutional investor.

Whenever I've considered this sort of option, I've thought it should be framed as an investment for the occupant as well.  Buying shares in your house is a hedge against rising rent: as rents go up, the value of your investment will go up as well and partially offset the rent increase.  Viewing it in this way is key in my opinion.  With this framing it would make sense to live in one rental building and buy shares in the building across the street.  It gives you full control over how much you want to put into your investment.  The decision on how much you would like to hedge your rent would be based off of so many new variables, such as the amount of time you spend in a particular place, and your future expectations on gentrification within the neighborhood.

This also allows a person to diversify their housing investments.  It's insane that we ever thought it was a good idea to leverage yourself on an investment in ONE house.  Perhaps you'd like to invest in several neighborhoods in your own city to protect yourself against the risk of housing prices in your home neighborhood declining in value.  Or, you can invest in comparable neighborhoods across different cities, to hedge against any city specific variation that might adversely affect housing prices.  The opportunities are endless.

Rent Stabilized Leases as a Commodity

I actually began thinking about this issue as a result of considering the effects of rent stabilization laws, and my first particular solution involved a revamping of this system.  Economists generally view this as they would any other price control.  The artificially low price of rent stabilized apartments makes them extremely hard to come by, the lower supply of market rate apartments cause all non-rent stabilized rents to be higher than they should be, and the fact that rents can't rise discourages investment by landlords into rent stabilized buildings.  Overall, it seems to be bad policy.

However, rent stabilization is a guarantee that your rent won't go up, which is the main risk you'd be hedging against in the housing share situation I described above.  This guarantee creates a sort of permanence that one would normally only get with home ownership.  Rent stabilized tenants have the same incentives as home owners to become active citizens and improve their communities.  In both cases they will reap the benefits of their improving neighborhood.

The economic distortions caused by the current implementation of rent stabilization disappears if these leases can be bought and sold.  Rent stabilized leases would be priced based on expectations of future increases.  Assuming a lease is being sold directly by a landlord in a previously market rate building, the landlord is compensated for his restricted lease.  The benefits of an improving neighborhood get moved from the landlord to the residents, which actually a better incentive system overall and avoids problems of "absentee landlords".

Over time, this will create an amazing variety of housing options.  As rent stabilized leases grow older an more out of touch with current market rates, their values will increase.  At any point, landlords could buy back their leases and create new ones based off of current market rates.  A wide spectrum will develop between pure home ownership and non-regulated market rents.  The first few rungs of the "housing ladder" will be lower, people can begin to buy less expensive regulated leases closer to the market price, and can work their way up to full home ownership over time.

Of course there are hurdles to implementing a system like this.  There is no clear answer to how to transition existing rent stabilized leases (in this case who "owns" the lease?)  Once in place however, it is a great way to keep the positives of rent stabilization such as stability and a renter's stake in a neighborhood, while getting rid of the market distortions rent stabilized leases causes.

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Decentralization: Disservice to the Poor or More Equitable Urban Arrangment?

Stephen Smith recently analyzed how off-center employment clusters end up being hurtful towards the poor.  It serves as a continuation on an earlier post of his, which explains how European cities have relegated skyscrapers to the periphery in order to preserve historic city cores.  He makes the argument that these off center skyscraper districts are the result of restrictions on central city growth (in Europe's case this is for historical preservation), and follows up by saying that these off center employment districts are not desirable.

This analysis ends up holding true with a few assumptions:  there is an existing monocentric city with a defined downtown, transportation is arranged to get people from the periphery to the center, and there is a relatively small number of off-center employment clusters.  Under these assumptions, it's absolutely correct that off-center employment clusters cause a disservice to the poor.  It will take longer to go from one side of the periphery to another, and the formation of off-center clusters will produce least favored quarters on the opposite side of the city.  Stephen frames this as a problem that is caused by restraints on development in the center of the city, and concludes that if only these constraints were lifted a monocentric city would emerge, and that city would be more beneficial to the poor and therefore more desireable.

I agree that restraining growth in the central city leads to inefficient land use, and that most cases you will look at can be captured in the above example.  However, I believe his conclusion that monocentric cities are desirable overall and the main government problem overall is restriction of central city development is a wrong one.

Stephen touches on the fact that most existing transit systems are built to get users from the periphery to the center, and that it's an interesting thought experiment to consider hypothetical decentralized transit system. I would actually argue this sort of transit arrangement is a major failing of the monocentric city.  I previously wrote about differing urban forms and how equitable they are, and came to the exact opposite conclusion as Stephen: decentralized cities are more equitable.  My assumption is independent of the skeleton you start out from: if you were looking at lots of different theoretical cities evolving over hundreds of years, those that evolved more decentralized would be more geographically equitable.

There is a similar issue when looking at the nature of these employment clusters.  I'd prefer to think of this in more continuous terms, and finding out where on the scale between centralized and completely evenly distributed employment a city is.  Aside from existing conditions, there's no reason why one sector would be preferred over another.  Given the right conditions, instead of having quadrants of the city with different fortunes, there will be no anchor for land prices to get bid up around, and an even distribution of rich and poor neighborhoods.

If you look at the article that spurred my analysis for example, you can see how it might be dangerous to follow Stephen's line of reasoning.  It may seem like a good thing to build up Downtown LA towards Manhattan style densities, but is this where we should be encouraging development?  LA developed mostly with the car in mind, and became really decentralized as a result.  While downtown LA suffered the same fate as the downtowns of older monocentric cities, it might not have been as grave a misinvestment as in other cities.  Because it's a newer city, LA developed it's decentralized "skeleton" that older cities with already established forms did not develop.  I'd argue that trying to centralize LA would lead to problems just as decentralizing older cities would.

Of course, my argument isn't simply that framing matters.  I believe that there if you were ever given the choice between decentralization and centralization, decentralization is more equitable.  While you run into problems trying to force multiple centers on an older centralized city, I think we should move in that direction whenever given the opportunity.  Using New York as an example, we should be building the Triboro RX instead of the Second Avenue Subway.

In my opinion it comes down to a timescale issue.  In the short term, do what's best given the existing urban form.  In the long term, where decisions can change the urban form, try to slowly but surely decentralize that form.  While restriction of development is definitely a problem, the more pressing concern is how hard it is to invest towards these long term goals.

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The Problem With Ranking Walkable Cities

I pulled this map from Richard Florida's latest post on the Atlantic Cities.  This map is his updated list of the top 10 walkable cities overall and the top 10 walkable large cities.

Florida explains several correlations based off of this data, but I was particularly struck by the arbitrariness of the top 10 cities overall.  Several small Gold Coast New Jersey and Boston area towns end up topping the list. Simply using municipal boundaries highlights the arbitrariness of these boundaries.  These walkable cities are incredibly small and might as well be neighborhoods of New York City and Boston.

I could think of a few ways to counter this.  Florida himself measured MSAs and megaregions by looking at contiguous illuminated areas on a nighttime satellite picture of the US.  Perhaps these regions can be used to get measurements of walk scores.  Alternatively you could weight the walk score with size, so that smaller walkable cities don't end up beating larger cities that contain suburban fringes within their boundaries.

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The Real Link Between Urban Growth and Gentrification

Many urban thinkers such as Edward Glaeser, Ryan Avent, and Matthew Yglesias make the simple economic argument in their latest books that increasing the supply of urban housing will lower its price.  While these books present sound cases against the commonly perceived notion that development causes higher prices, there are still several examples of neighborhoods experiencing both influxes of development and higher prices that would lead people to link them causally.

Stephen Smith addresses these concerns by saying it all comes down to amenities.  These poor urban neighborhoods have attractive housing stock, but lack goods and services that more wealthy residents would demand.  New development brings along these new amenities.  New development by itself acts to lower housing prices, but this decrease is overcome by the increase in prices caused by the new amenities.  If this cycle were allowed to continue, the diminishing marginal returns to amenities would eventually lead to a peak in housing prices and cause them to start dropping again.  However, before that happens the new wealthier and more politically savvy neighborhood residents would fight against development, causing prices to remain high and for gentrification to continue to spread outward.

I've thought of these issues as well, and while my conclusions are similar I've always had a slightly different line of thinking.  Amenities tell only a small part of this story, and I think there's way more going on here.

Given any exogenous increase in demand, prices will start to rise.  Higher prices lead to development, and normally this development will occur until prices go back to their original levels.  If there are any restraints to development, then any increase in demand will lead to both increased development and increasing prices, which could lead outside observers to incorrectly assume that development is causing higher prices.  This feeling will lead to more restrictions on development, and this conventional wisdom becomes a self fulfilling prophecy.  NIMBYism very easily breeds more NIMBYism.

That's the bare bones of what's going on.  It completely explains why there's a perceived link between development and rising prices, why it's fought against so hard, and doesn't even take into account amenities or gentrification.

Stephen does have some absolutely valid points, and it is fascinating piece of analysis in its own right. There is a diminishing marginal return to amenities, there is more NIMBY activism in wealthy neighborhoods than in poorer neighborhoods, and this does lead to an acceleration in the existing process of gentrification.  I begin to disagree when he expands this argument and says that the presence of amenities is when things start to go awry.

I think that the increase in demand is where everything begins, and is the culprit behind everything that follows: development, rising prices, and increased amenities.  Amenities don't automatically come with new development, they arrive for the same reasons as developments.  Amenities are a result of the surrounding population, and the population is determined by housing prices.  If these housing prices are artificially high because development wasn't allowed to keep them low, higher class amenities will follow.

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Maspeth: New York City's Cycling Capital, 2021

I just discovered a cool feature that I didn't notice before on Mapnificent that allows you to calculate travel times depending on whether or not you have your bike.  I've always thought about what sort of long term effects prevalent bike usage would have on the geography of the city, and this tool allows you to get a visual idea of this.  So many areas are easier to get to if you don't have to worry about staying close to a subway line, and even more areas open up if you take your bike on the subway, which is how Mapnificent does its calculations

Check out what sort of difference having your bike makes if you're trying to get to Union Square in 30 minutes:

The odd spacing of subways in some areas of the outer boroughs creates some weird areas that are physically close to Manhattan, but are not subway adjacent and inconvenient to get to without a car.  While having a bike expands the range of where you're able to go on the margins, the most dramatic results are in these spaces where gaps in subway lines are filled.  Take a closer look at Queens:

The Astoria Waterfront and Maspeth are the two areas where having a bike would provide the greatest transportation improvement, and are two potential locations for outer borough bike commuter neighborhoods.  Red Hook is in the same position:

This sort of approach isn't perfect (for example, it assumes that if you live in Weehawken you can fly across the Hudson), but it gives a rough idea of what sort of changes one would expect once biking becomes a more established form of transportation.

Bike infrastructure development currently has been focused on already dense neighborhoods.  This has been a great way to allow biking to gain a foothold in the city, but the next step should be to become more forward looking, and develop infrastructure in areas with the most potential to become bicycle dependent in the future.

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US Treasuries Are A Giffen Good

Technically this isn't true. But it's the exact same dynamics: a secondary effect of treasury markets is superseding what you'd think the primary effect would be.

This Business Week article is what originally got me thinking about this. This is what it says happened to treasuries after yesterday's sell off:

Some analysts had worried that Treasury yields would surge after S&P's downgrade. That would happen if investors demanded higher returns to compensate for their risk.

The opposite happened. Treasury yields fell Monday to their lowest level of the year as investors sought a safe place for their cash. Their actions showed continued confidence in long-term U.S. debt.

This got me immediately thinking of the example always used for Giffen Goods. People eat rice and meat. The price of rice goes up. You'd expect less people to buy less rice because of this. But meat is a luxury while rice is an inferior good, and the rise in price of rice makes people so much more comparably poorer that they eat more of the inferior good: rice.

US treasuries are indeed an inferior good. They're seen as a safe haven investment when risk is too high in other markets. This "risk effect" can be compared to the income effect. The S&P downgrade of US treasuries can be compared to the price going up. Under normal circumstances, a downgrade would cause less people to invest in a country's treasuries. But, this downgrade ended up jolting markets so much and rising risk everywhere that people wanted to rush to the safer investment: US treasuries.

To make the comparison clearer I'll bring it back to food. Assume people eat only two things: bread and sushi made from a small, safe, and tasty sliver of an otherwise deadly poisonous blowfish. Now consider what happens if a small percentage of bread is found to be poisonous. You'd expect people to eat less bread now that it's less safe. But, this got people thinking about how much risk they should be taking in their food, and all of a sudden it doesn't seem like such a great idea to be risking your health on deadly blowfish if even BREAD can kill you.

So, paradoxically, as bread becomes more dangerous, people will eat more bread. Giffenish behavior if you ask me!

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Another Way to Implement Higher Gas Taxes

The Economist's Free Exchange Blog wrote recently about just how effective gas taxes are in spurring investments in alternative energies and in changing consumer behavior. Jim Manzi originally argues that because short term elasticity is so low, gas taxes won't have an effect on consumer behavior and shouldn't really be used as a policy tool. The Economist blogger counters this point by pointing out that either way the tax will achieve something. If elasticity is low, then the tax will be extremely effective at raising funds which could be put towards research, and if elasticity is high then the tax will be extremely effective at changing consumer behavior.

However, for both of these cases we still have price volatility. Assuming that spikes in gas prices occur in the short-term low-elasticity time scales, exogenous spikes will have no behavioral effects, will decrease real disposable incomes, and will lead to a more inefficient allocation of consumer spending as people are spending too much on fuel during these periods of high gas prices.

One would think that a long term expectation of oil price volatility is enough incentive to drive investment into alternative fuels or change consumer behavior. Assuming that it isn't (or won't have an effect for a while), the volatility is simply a dead weight on the economy.

So, how about you set tax policy such that gas prices + tax will always be $6 a gallon no matter what sort of market fluctuations occur? If gas prices are predictably high like this for the consumer, the higher long term elasticity will come into play and behaviors will be more likely to change. Not only that, but simply the expectation of steady but high gas prices will cause the long term behavior to kick in sooner, meaning that behavior will change even more quickly. The dead weight cost of volatility disappears, funds are raised through the tax for research, and behavior will change to demand that research.

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