H2.0

Lee Fennell’s Homeownership 2.0 is provocative and deeply interesting—as with all her work, it is a pleasure to read. The idea that we could separate on-site and off-site factors in the home purchasing decision is attractive. For me, it is primarily attractive because it might reduce (in Lee’s language) “costly basket-guarding behaviors”: the homeowner’s extreme risk aversion to newcomers and the NIMBY(“not in my backyard”)ism that accompanies it. But I am skeptical that this proposal can get us there for a number of reasons:

First, why slice and dice homeownership when we have a form of tenure – the leasehold – that is better positioned to deal with on-site and off-site risk? I wasn’t quite persuaded that we shouldn't make renting a more robust form of ownership rather than making homeownership somewhat less robust.  Why aren't renters the ideal since they only have the consumption interest in homeownership?  I agree that homeownership has tax advantages and psychological ones, but my immediate reaction to the idea of bifurcating the risk in ownership is to encourage long-term leaseholds and give renters some of the tax benefits that owners currently enjoy.

Second, I wonder if off-site factors swamp on-site factors, conceptually.  All houses are really bundles of off-site characteristics, i.e., location, location, location; the on-site amenities and maintenance mean almost zero if the house is located on the North Pole.  These locational factors are huge, it seems to me—particularly if you factor in access to employment markets.

Third, I worry about giving absentee investors a stake in controlling off-site factors.  Most investors will want a say in community governance, which introduces a lot of complications. What kind of pressure can these investors apply to local governments to adopt new zoning rules, deny development permits, prevent unwanted uses, or disfavor racially-heterogeneous neighborhoods?  In an H2.0 regime, I'd predict increased neighborhood homogeneity as investors (like big developers) create standardized products while trying to limit their risk—investment money would flow to expanding white suburbs, the problem of redlining would reemerge under the guise of this new financial product.  Perhaps Lee is betting that investors will be more rational than risk-averse homeowners, but I’m not persuaded. There is no reason to think that new H2.0 investors will operate any differently than the traditional investment partners of homeowners: banks and mortgage companies.

This leads me to my last comment. Perhaps, in light of the subprime mortgage debacle, this is not the time to create new fungible investment vehicles that will operate on a national scale.  One could make the argument that the local savings and loan, investing in the local housing market, kept capital in the community and maintained the stability of neighborhoods (in part because the investors in the savings and loan often lived there).  Coops and other forms of collectivized equity seem to try to recreate that community-investment link; it is interesting to note that Lee’s proposal tries to dilute that link.

Comments

[Michael Martin]

Rick,

First, leaseholds still bundle on-site and off-site risks, just over a shorter period of time, and with residual risk held by another.

Second, you say: "the on-site amenities and maintenance mean almost zero if the house is located on the North Pole."

I think you're thinking of Manhattan rather than the North Pole here. The on-site amenities are pretty key on the North Pole. But I get your point.

The answer is that it's not so important to bifurcate when either on-site or off-site factors dominate. It's important to bifurcate risk when the two are pretty close to equal but uncorrelated. So houses located around factories in rural areas would be the best candidates for this type of insurance.

Third, you say: "Most investors will want a say in community governance, which introduces a lot of complications."

Actually, the complications are even worse for the individual homeowners who have to get organized locally in order to fight the zoning board, &c. Unlike investors, they're generally busy with other things during the day.

Last, the subprime debacle would very likely have been avoided had there been some large insurance companies bearing off-site risks to push back at the assessors who had incentives to continue inflating prices to meet the explosive demand generated by CDOs and CDO^2s. The sytematic failure that led to the subprime bubble was the lack of a flow of negative feedback to these assessors and the home buyers who agreed to the inflated prices. Had off-site insurance providers been raising their prices at the same time, we would at least have had a more stable system, if not avoiding a resonance (i.e., bubble) entirely.

[Michael F. Martin]

I used too much jargon in the comment above. Here's another attempt at explaining the insight that Lee Fennell gives into designing a more stable housing market:

http://brokensymmetry.typepad.com/broken_symmetry/2008/05/stable-market-d.html