Wednesday, July 22, 2009

Housing and wealth

A common perception for buying a house is that it represents built up equity and a source of funds for retirement. The very idea that home ownership promotes saving and wealth accumulation is almost unassailable until recently. This idea is being challenged by Glaeser and Shapiro.

Widespread homeownership, the theory goes, benefits the nation because homeowners—literally invested in their communities—make better citizens. A few years ago, the economists Edward Glaeser and Jesse Shapiro looked at the evidence and concluded that, by and large, this is true: Even allowing for confounding factors such as income, family size, age, and so forth, owners spend more on maintaining their homes, vote more, play a more active part in local politics, and work harder to improve their neighborhoods.

But there are drawbacks, too. Andrew Oswald, an economist at the University of Warwick, found that homeownership makes workers less mobile, which brakes economic growth and worsens unemployment, especially in areas blighted by the decline of locally dominant industries. ... Glaeser and Shapiro point to other social costs. Communities of homeowners tend to act as cartels—calling for zoning rules, for instance, that suppress new development. At a minimum, the wider benefits of homeownership are not clear-cut.

Interestingly, no one (as far as I can tell) has looked at the effects of home ownership on retirement wealth. The true measure of the causal effects of home ownership on wealth is a randomized trial. Randomize citizens into renters and owners and look at retirement wealth. This is because those who rent may be very different than those who own. It has been argued (somewhere) that those who buy a home use it as a commitment device to increase saving. If this is true thent he question is whether there are other more efficient commitment devices or weather saving in an alternative investment might have yielded higher returns. As the article states, homeowners tend to spend to maintain their home values and whether this spending is the best use of the homeowner's funds.

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