Houses, Costs, and Uncertainty

I have another guest column on FindLaw this week, "Mortgages, Housing, and the American Dream: Do We Really Need to Own Our Homes?" to be posted later today (here). In that article, I pick up on my Dorf on Law posts from last August (here, here, and here) to argue that the United States should move away from its fixation on the idea that success in life must include owning one's own home. Here, I would like to expand on a point that I make only tangentially toward the end of that column: "In fact, everything that one can do in a house can be done in a rental. The difference is that the renter will be given an explicit price up front for doing what she wants, whereas the cost of doing what one wants to a house is hidden until the house is up for sale."

The more I think about those two sentences, the more I am shocked that Americans think about owning their homes as being fundamentally different from renting. If there were a market for rentals (including house rentals, not just apartments) that was both broad and deep, renters and owners would be able to negotiate intelligently (and with alternatives) over virtually every aspect of living. Do you want to be sure that your rent will not rise for ten years? You could either sign a ten-year lease or negotiate a contract that would value the guarantee appropriately while allowing you to move out in less than ten years. Do you want to add a room to the back of the house? You and the owner could split the cost based on the length of time that you expect to live in the house, taking account of the change in the value of the underlying property. Multiple pets would be an easy issue, as would design choices, landscaping, and pretty much everything else.

The reason that this is so shocking, once one thinks about it, is that people have convinced themselves that owning their homes puts them in a fundamentally different position because they can do "whatever they want" as owners, whereas they are slaves to their landlord as renters. The simple fact, however, is that doing what one wants always has consequences. Add a room? The homeowner carries the cost of financing (either the interest cost on a loan or lost income from otherwise investing the money) and the risk that the room will not increase the underlying value of the home when they need/choose to sell. The big difference, again, is that in a rental agreement an owner (who, presumably, would own multiple properties in order to spread risk) would let the renter know the cost of each decision up front.

The bigger society-wide gain from allowing ownership of homes to be separated from occupancy, of course, is that owners of multiple properties are less likely to find themselves in a must-sell mode than an individual owner who might have been transferred to a new location on short notice. The risk in the system would thus be distributed in a way that would reduce the likelihood of net-worth-destroying losses if a sale must be made at the wrong time.

None of this is based on an even mildly advanced or controversial theory. This is basic economics, basic finance, and basic contracting. The thing that prevents it from happening is the public policies -- and the public attitudes that strongly support those public policies -- that push people into buying rather than renting. Change the policies -- the home mortgage interest deduction, the first-time home buyer credit, the programs that support and expand the availability of mortgage financing -- and the market fundamentals will change. Even though there is no law saying, "You may not rent a single-family home," the laws that do exist push people into ownership and thus shrink the potential market for rentals to the point where it is simply too small to develop reasonable market norms and equilibrium prices that reliably reflect underlying values.

What makes this especially interesting is that changing the system would be entirely a matter of law. That is, unlike ideas to, for example, change the transportation system to discourage automobile ownership and encourage the use of public transportation, changing the norms of home ownership versus renting does not require billions of dollars worth of public investment in a new or different infrastructure. If the laws were changed, people would begin to develop market transactions that would spread risk while allowing people to continue to live in the existing housing stock.

As breathlessly optimistic as all this might sound, of course, the cold reality is that "merely" changing the laws regarding home ownership is in some ways more daunting than building a network of high-speed rail lines. It would be futile for me to make a proposal along the lines that I have described here to any politician. Social Security used to be thought of as the "third rail of American politics" (touch it and die), but the social norms that extol the virtues of owning one's home make that look like child's play. As I said in response to a comment on one of my posts last August, this idea is surely a political non-starter, but "[t]hat's what tenure is for!"

-- Posted by Neil H. Buchanan