Homeownership 2.0 Debate -- Wrapping Up

This week, Rich Schragger and I have been debating my forthcoming piece, Homeownership 2.0. Rich has made a number of excellent points.  In this last post, I want to respond to Rich's most recent post and say a little more about the broader case for H2.0. 

Rich argues that a large fraction of whites prefer racially homogeneous neighborhoods, and that H2.0 investors will respond to consumer demand by resisting integration and engaging in discriminatory practices.  I agree that H2.0 investors (like anyone else) will take measures to avoid bearing financial losses.  I also grant that if enough people hold bigoted housing preferences, whoever holds the offsite investment component for housing will have an incentive to discriminate.  It is interesting, though, that Rich's preferred approach would be to expand leaseholding, which just as surely as H2.0 pushes the investment component to someone other than the home's occupant.  One might think he would similarly worry that landlords will become (in  his words) "a large and powerful class of absentee owners who will have every incentive to intervene in local government to secure their fungible property interests."  Animus-based discrimination requires government intervention regardless of who holds the investment interest, and I see no reason to think that investors will be harder to regulate than homeowners or landlords. 

It is worth asking, however, whether outright prejudice is really the full story.  Suppose that many white homeowners resist integration not because they dislike living near people of another race, but because they fear the reactions of prospective buyers to an integrated community (or because they fear the reactions that prospective buyers will fear that their prospective buyers will have).  These layers of speculation, when coupled with the extreme risk aversion of the undiversified individual homeowner, may result in resistance to changes that actually have a positive expected value for most homeowners.  If homeowners were able to offload risk to investors, they might well stop acting so fearfully.  This, in turn, would alter the signal that investors get about what will or will not subtract value.  In other words, homeowner preferences may end up looking a lot different when we take away the element of investment risk, and investors should be expected to respond accordingly.

I want to emphasize that these potentially salutary effects on homeowner behavior are only one of several reasons why a move to H2.0 might make sense. Affordability is another:  Allowing people to alienate upside potential in their homes can allow  low-income, credit-constrained families greater access to homeownership.  With homeownership comes a stable option to remain in the neighborhood, which encourages site-specific investments in social capital.  Downside protection can also serve important values by ensuring that moves are made for the right reasons.  No longer will people feel that they must sell quickly to avoid a coming drop in home values, or delay transferring to a new job in order to avoid realizing a loss on a home. 

As with any new innovation, H2.0 would carry some risk of unwanted consequences.  I am very grateful to have had this exchange with Rich, because it has usefully fleshed out some of those worries and some possible responses to them. A number of other potential concerns are raised and addressed in the paper.  Certainly, H2.0 would not be ideal for everyone.  Consumers and regulators would confront a learning curve in adapting to it..  But, on balance, adding a new alternative to the slate of tenure choices seems worth a shot. 

Comments

[Vineeth]

I very much enjoyed this debate and I think this is a very valuable and interesting idea. I was hoping you would elaborate more on what kind of regulations you would impose on the H20 investors. You mentioned in this recent post that regulating these investors would not be more difficult than regulating homeowners or landlords. My impression is that regulating homeowners with the intention of preventing them from discriminating is much more difficult than regulating landlords.

Most states have landlord/tenant laws that protect against discrimination and offer avenues through which one may file complaints. How do government regulations prevent homeowners from moving out of neighborhoods when a minority family moves in?

Accordingly, how would regulation prevent investors from investing in homogenized suburban areas? Even if homeowners' fears were quelled after living with minority families and acted less fearfully, investors, wouldn't investors want to put their money (or at least most of it) in low risk areas? How would regulators discern whether this investing is animus-based discrimination?

I would bet that lease holding, with all of the protections that come with landlord/tenant laws, is the system in which regulation to prevent discriminatory practices can be most effectively implemented. Though I see that H20 has many desirable aspects, sustaining thriving diverse communities is not one of them.

[Michael F. Martin]

So it appears that even Charlie Munger hasn't noticed what Prof. Lee Fennell has pointed out -- viz., that we would have a more stable system if positive and negative externalities were bundled at the source of our price signals, individual consumers.

http://brokensymmetry.typepad.com/broken_symmetry/2008/05/slicing-and-dic.html