In 2019, I argued that Kansas City’s debate over “luxury” apartments missed a basic point: housing markets are connected. When higher-income households move into new buildings, they leave something behind. Those vacancies matter. New research now makes that case with concrete evidence.

A recent piece in The Atlantic detailed the study. Researchers studied a 43-story condominium tower in Honolulu and tracked what economists call “vacancy chains”—who moved into the new units and who moved into the homes they left. The results were measurable and citywide.

The building’s 512 units generated at least 557 vacancies elsewhere. On average, residents moving into the tower left homes that were 38 percent cheaper per square foot. One step further down the chain, homes were 44 percent cheaper than the new condos. Each new market-rate unit created roughly 1.6 vacancies elsewhere in the city.

This research builds on earlier national work, which found that new market-rate construction prompts substantial movement out of below-median-income neighborhoods. As households move up, older units filter down. The process is gradual but observable.

Kansas City is not Honolulu. Our housing stock is less geographically constrained, and our prices are lower. But the economics of supply do not change by region. When we restrict new multifamily construction—through zoning caps, parking mandates, or prolonged approval processes—we constrain mobility.

Mobility allows households to adjust to new jobs, schools, and changing family needs. Nationally, residential mobility has fallen sharply over the past half-century. Culture plays a role, but so does housing availability. Fewer vacancies mean fewer options.

Kansas City faces a quieter risk: complacency. Because our prices have not reached coastal extremes, it is easy to assume supply is sufficient. Yet rents and home prices have risen faster than incomes in recent years. If we make it harder to build—luxury or otherwise—we should expect fewer vacancies and higher prices over time.

Certainly, luxury housing construction should not be subsidized. Much of the local controversy over “luxury” projects arises when developers seek public incentives. But housing construction at all levels is welcome. Today’s Class A building becomes tomorrow’s middle-income housing. Aging is built into the market.

The real question is not who benefits from the first occupant of a new building. It is who benefits over the next decade.

If Kansas City wants more affordable options tomorrow, it needs more housing—of all kinds—today.

The post Luxury Housing Still Helps Lower-Income Renters appeared first on Show-Me Institute.

Then, interest rates went up.

In a well-functioning market, the process should have reversed itself. The higher interest rates pushed the total price of purchasing a home back up, which surely lowered demand. At the same time, with house prices still far above the pre-pandemic level, builders should have been building like mad to bring homes to the market. These two forces should have resulted in a housing price correction. But this is not what happened. The higher interest rates have cooled demand, but prices remain high. Below is a chart I created using the Federal Reserve Economic Data (FRED) system. It shows the trend in the median U.S. home price since February 2020, just before the pandemic. The average price of a home in the United States grew by roughly $120,000, or about 38 percent, from the first quarter of 2020 to the third quarter of 2022. It has declined modestly of late, but not much.

The bizarre thing is that builders haven’t responded to the higher prices. In fact, FRED data show new housing starts today are lower than before the pandemic. Meanwhile, many existing homeowners are “locked in” with low-rate mortgages and reluctant to move, further constraining supply. Even with tempered demand due to the combination of high prices and high interest rates, the lack of supply is keeping prices elevated.

But what are the builders doing? They should be falling all over themselves to bring new houses to the market. Think of it this way: If it was profitable to build homes in Q1-2020, it should have been even more profitable by Q3-2022, continuing until today.

A recent issue of the Journal of Economic Perspectives (JEP) brings together several groups of economists to weigh in on the housing market. I read the issue with great interest. One of the most striking findings is that in many major markets, the price elasticity of housing supply is very low, which means builders barely respond to rising prices with new construction. This is odd. Normally, suppliers should respond strongly to higher prices, which put more money in their pockets. In fact, the invisible hand of the free market depends on it.

The articles discuss several reasons builders have responded so weakly to higher prices. With respect to the recent situation specifically, one might initially blame it on rising construction costs, but the articles suggest this is not the primary explanation. Rather, they emphasize the role of regulations and zoning. Local land-use rules, approval processes, and other restrictions make it slow and costly to build, even when market prices suggest that building more housing should be profitable.

Another interesting finding from the research is that we don’t need to focus on building low-income housing to make housing affordable. If we build higher-end homes, people will move into them from less desirable homes, which will then become more affordable. The effect of building homes at the higher end of the market cascades down.

In short, we just need to get out of the way of the market.

So, the next time you hear complaints about high home prices or a shortage of low-income housing, remember the biggest obstacle is the rules we’ve chosen for ourselves. Deregulating housing construction, and thereby expanding supply, offers the clearest path to putting homeownership in reach for more Americans.

The post What’s Wrong with the Housing Market? appeared first on Show-Me Institute.

The story is similar to a piece published almost a year ago by Flatland, an online news source operated by Kansas City PBS that claims to be “committed to providing context” to the region’s challenges. The breathless piece was titled: “5 Companies Own 8,000 Kansas City Area Homes, Creating Intense Competition for Residents.” That claim comes from a 2023 study from the Mid-America Regional Council (MARC), which states: “Nearly 14,000 single-family homes in the region are owned by 33 companies. Of these, five companies own nearly 8,000 homes.”

Okay. Is that a lot? How many single-family homes are there in the region? The MARC report doesn’t say. Flatland, despite its commitment to context, provides none. Neither does the Star.

I’ve reached out to MARC for these data, but while I’m waiting, I did some basic calculations. The Census estimates there are 969,534 housing units in the Kansas City Metropolitan Statistical Area. Nationwide, about 74% of housing units are single-family residences. Data provided by the Greater Kansas City Regional Housing Partnership indicate there are 682,546 single-family homes in the region. If 14,000 are owned by institutional investors, that amounts to 2% of the market.

Are we being asked to believe that large firms and investors owning 2% of the housing market is “contributing to rising prices” or “creating intense competition?” Really?

The worst part is that, according to the Star, Missouri legislators are considering an effort to bar corporations from buying residential real estate.

While it may be ideologically satisfying to cast corporate landlords or institutional investors as the real enemy, it does nothing to actually solve the problem. The truth is that housing affordability is driven more by restrictive government regulations that impede the ability of the free market to meet demand. Zoning restrictions, burdensome regulations, neighborhood NIMBYism, and slow permitting and approval processes are the actual drivers of housing costs. Addressing those problems requires real policy work.

Using legislation to tinker with who is permitted to buy homes may feel like progress, but it is more likely to reinforce the problematic status quo in housing—too many rules and not enough houses.

The post Reporting on Housing Fails to Ask Basic Question appeared first on Show-Me Institute.

These are average values, of course, and not everyone can afford an average mortgage or rent payment. However, the United Way also ranks St. Louis second in the nation (tied with Pittsburgh and trailing only Cincinnati) for the highest number of affordable rental units (80) per 100 households.

It’s good to see St. Louis earn a high national ranking in something other than crime; nevertheless, 80 rental units for every 100 households that need a place to live still isn’t enough housing. So, what can St. Louis do to meet the remaining affordable housing demand?

First, local governments need to get out of the way and let the free market work its magic. My colleague Patrick Tuohey has highlighted the harm that misguided government intervention has done to housing markets in both St. Louis and Kansas City:

Kansas City’s adoption of the 2021 International Energy Conservation Code (IECC) stifled new home construction by inflating costs. Builders, facing steep regulatory burdens, simply stopped building. In St. Louis, a reliance on tax credits and incentives for flashy developments has left vast swaths of the city with vacant lots and dilapidated buildings. In both cities, the results are clear: policies that ignore basic market principles fail to deliver desired results.

Second, the demand for low-income housing can be met indirectly by constructing more expensive or luxury housing. More housing, whether low-income or luxury, is beneficial and will positively impact the availability of affordable housing. Even if the construction of luxury housing occurs when there is a greater demand for profitable low-income housing, the filtering effect will help address the need.

Andrew Cline of The Josiah Bartlett Center for Public Policy extrapolates on the positive effect of luxury housing construction, describing the filtering effects of new apartment development:

Building luxury or higher-end apartments draws higher-income renters out of yesterday’s luxury apartments and into the new luxury apartments. Increased vacancies in yesterday’s luxury apartments attract higher-income residents who’ve been living in mid-level apartments. As new construction creates more vacancies, rents come down. That effect filters throughout the housing supply, lowering rents all the way down. 

It is precisely because of this filtering effect that projects like the one in Town and Country are good news even for those looking for something in a lower price range. While a new luxury condominium development may seem irrelevant to someone seeking a more affordable place to live, it nevertheless represents an increase in supply and exerts downward pressure on housing prices.

The post For More Affordable Housing We Need More Housing, Period appeared first on Show-Me Institute.

The post Gas Prices are on the Rise appeared first on Show-Me Institute.

Nationally, 20 percent of parents surveyed in a recent National Center for Education Statistics report moved to a neighborhood for a public school (page 79). That’s one fifth of parents who are willing to relocate their family for a quality education, including in Missouri.

Moving across district lines can be particularly expensive when you’re moving into a high-performing school district. A 2013 analysis from Redfin looked at price differences among homes in a lower-performing school district (as measured by test scores) compared to a higher-performing school district. It found that homes nearly identical in size cost about $50 more per square foot in higher-performing districts. Some areas had a $130,000 price increase for a similar home just across the school district line. This is a significant barrier for families trying to access quality schools.

Not every family has the option to move for a school. Options like charter schools, education savings accounts, and even course access can provide families access to better education without the costly and disruptive process of moving. Attending a good school should be an option for every family in Missouri, regardless of where they live.

The post School Choice through Housing appeared first on Show-Me Institute.

I’ve had numerous conversations with parents of young children in St. Louis County who are trying to figure out where and how to buy a house before their child enters kindergarten. And it matters. A 1,900 square foot home with three bedrooms and two bathrooms built in 1990 will cost $240,000 in Florissant, while a similar home would cost $389,900 in Frontenac. Sure, schools aren’t the only difference between the two communities, but they’re certainly factored into that $150,000 premium.

I don’t think I even need to convince anyone of this point—parents who can will pay more money for the same house to get their kids into a school they want. Parents who don’t have the money to do that are stuck. The idea of celebrities buying a spot at USC shocks us in a way that a family scraping together the money to move to a smaller house because it’s in Webster Groves doesn’t.

The quality of a child’s education shouldn’t be connected to the real estate industry. Every parent, regardless of their background or their neighborhood, should have access to an array of choices when it comes to their child’s education.

The post Pay to Play in Education appeared first on Show-Me Institute.

In a word, no.

Despite wishful thinking (and some fuzzy math) from boosters like the Downtown Council, millennials nationwide are choosing to leave cities when they decide to buy a home. According to a study conducted for Ernst & Young, a plurality of millennials, 38 percent, live in the suburbs. According to CNBC,

Among millennial homeowners, the suburbs are the clear No. 1 choice: 41 percent of millennial owners opt for suburbs over cities, small towns or rural areas. That’s up from 36 percent in 2016, Cathy Koch, EY’s Americas Tax Policy Leader, tells CNBC Make It.

It’s not just that they’re settling down as they get older, either, Koch says. When looking at the very same age group today compared to two years ago, there’s an increase in the share of millennials living in the suburbs.

“It was a surprise to me to see this generation increasingly choosing suburban locations to buy homes,” Koch says, but the trend makes sense: “The ‘suburbs’ may very well be smaller cities close to larger urban areas — these still afford the richness of city living (including employment opportunities) at maybe lower home prices.”

The focus on Kansas City’s downtown has not yielded a return worthy of the investment. We’re not attracting millennials. Even the tourism numbers promulgated by the city’s tourism board are suspect. Certainly Kansas City is suffering the same fate of many cities through no fault of its own. But the degree to which that city leaders have focused on developing streetcars, convention hotels, and the airport—while seemingly ignoring a years’ long spike in homicides—demonstrates an unwillingness to face reality.

The post Millennials Are Buying in the Suburbs appeared first on Show-Me Institute.

Not being from Saint Louis, the advisor did not know that almost unrealistically cheap rent (from the rest of the country’s perspective) is readily available in the region. In fact, Saint Louis was just named the most affordable major city in the country for recent grads by Trulia Trends (“investigators of unconventional house hunting trends”).

Their analysis showed that a recent grad in Saint Louis would on average make just under $26,000, allowing them to afford almost 20 percent of units in Saint Louis. How expensive can it get in other cities? In Portland, Oregon, the median wage of recent grads is under $19,000, which would allow them to afford about 0.1 percent of rental units available. Following close behind Portland, in terms of unaffordability, are Riverside, Orange County, and Miami.

One might assume that the relationship here is one of growth and desirability. Saint Louis, with relatively low growth, is not as attractive as the fast-growing Portland or Miami. But economic growth is not the whole story, because following Saint Louis on the list of affordable metros are some of the fastest-growing metropolitan areas in the nation, including Houston, Dallas, Atlanta, and Phoenix. Most likely, multiple factors, including desirable weather and urban containment policies (of which Portland has been a very prominent example), are important in making a city unaffordable for young people. Put simply, it takes capped supply along with high demand for rent to become unattainable for the average grad.

As things stand, Saint Louis is in the opposite situation from cities like Portland or Boston, in that there is plenty of supply but not a whole lot of demand. That puts Saint Louis in a good position to attract startup businesses and startup graduates from more expensive metropolitan areas. However, if Saint Louis is to gather momentum in attracting businesses, it should keep a positive regulatory attitude toward new building and avoid restricting supply through urban containment.

The post Cheap Rent: A Saint Louis Advantage appeared first on Show-Me Institute.

This is a tale of two neighborhoods. Both Saint Louis-area neighborhoods are impressive and outwardly they look like twins. Hampton Park and Lake Forest sit on opposite sides of Hanley Road between Clayton Road and Highway 40, and they both boast large, stately homes. They are equidistant from the region’s central business districts. With two exceptions, they have the same level and quality of public services and the same tax rates. With so many similarities, you might assume property values would be the same. But you would be wrong.

Hampton Park and Lake Forest illustrate how different people finding different solutions to their housing and educational needs can have a substantial impact on housing prices.

The two exceptions noted above are the neighborhood school districts and the differing tax rates they impose. Both neighborhoods are subdivisions of Richmond Heights, but Lake Forest — which is located west of Hanley — is part of Clayton School District. In 2010, Clayton was the highest performing district in Missouri according to MAP scores. Over the past 10 years, residents have paid an average tax rate of $3.44 per $100 of assessed valuation. East of Hanley, Hampton Park is part of Maplewood-Richmond Heights (MRH) school district. In 2010, the state ranked MRH’s performance 315th out of 556 districts, making it an average district. Over the past decade, residents paid an average tax rate of $4.48.

Homes in Lake Forest are located in a higher performing school district and have lower tax rates than those across the street in Hampton Park. Do homebuyers react accordingly, and by how much?

Of course homebuyers adjust. According to a study of assessed valuations in the two neighborhoods, the difference between the prices paid for a theoretical house of the same square footage and lot size in the two neighborhoods is $109,000, or a little more than 10 percent. Homebuyers in Lake Forest are willing to pay approximately $109,000 more to live in a higher-performing school district with lower tax rates. Conversely, homebuyers in Hampton Park are paying $109,000 less to live in a more average school district with higher tax rates. Economists refer to this kind of difference as capitalization. It is the process that incorporates tax rates and other variables into the value of a piece of property.

Capitalization is a complex process, especially in regions that have as many taxing districts as Saint Louis. Prospective homebuyers typically take the time to research local school quality and tax rates, but they usually stop short of researching fire districts. Although homebuyers may not investigate them, the insurance industry certainly has. A home located in an area with a poor quality fire district will have higher insurance rates, and those higher rates will be translated into lower home prices. The combined wisdom of thousands of individual decisions is sorted into a price that is readily understood by everyone.

Capitalization works in both directions, often simultaneously. A great school district will lead to higher property prices, while the high tax rates used to fund those good schools will lower the price. The low crime rates of the outer suburbs will increase prices, while the higher commuting costs will lower prices. As for Lake Forest, the lower tax rates leads to higher home prices, and this may result in the same final tax bill as higher rates on less valuable property.

The higher tax rates and lower ranking school district do not automatically do economic harm to the residents of Hampton Park. A Hampton Park purchaser may intend to send their children to private or parochial schools and might be using the $109,000 discount to do just that. This appears to be the case for many residents, as the MHR school district offers no school bus service within Hampton Park. In effect, the $109,000 price difference can be viewed as a voucher toward the cost of private education, the payment of future (higher) taxes, or both.

The larger point is that with the variety of different cities, school districts, etc. that we have in Saint Louis County, there is an abundance of choices, making it more likely that everyone can find a suitable combination of taxes and services. Homeowners vote with their feet — by leaving cities that increase taxes too much or fail to offer quality services. This pressures cities to be efficient. That pressure and competition is reflected in property values, and that benefits all of us.

Gaudiet emptor — Let the buyer rejoice!

The post A $ 109,000 School “Voucher”: A Story of Tax Rates and School Districts appeared first on Show-Me Institute.

National Public Radio ran a segment today on a Cleveland-area land bank. According to reporter Mhari Saito, the Cuyahoga Land Bank (CLB) is scheduled to demolish about 700 properties this year.

The situation in Cleveland looks like this: A family goes into mortgage foreclosure. The lender takes the home, but is unable to sell it, given the depressed economy. It costs money for the lender to maintain the home while it sits vacant. And, if lenders don’t maintain their properties, they can face large code violation fines.

Looking for a solution, the CLB has made an offer to lenders: Pay to demolish the house, and the land bank will take the property from you. Seems like a win-win solution, right? In fact, Saito characterizes it as such. From her report:

Lenders pay $3,500 to $7,500 per house. Wells Fargo’s Russ Cross says it’s a sensible and responsible business plan.

“We want to make loans on an ongoing basis, and to do so, we need stable to rising home values,” he says. “We’ve got to do whatever we can to protect home values in neighborhoods.”

Given the policy catastrophes we’ve seen at the Saint Louis land bank and  the burgeoning land bank growth across the U.S., the policy of running bulldozers over hundreds of properties each year needs to be considered seriously.

Let’s talk about the need to “protect home values.” While existing homeowners might want to keep their home values at artificially high prices, the fact of the matter is, home values have fallen. Attempting to boost home values by destroying existing home supply is no solution. In fact, consider who is hurt by this solution: Low income individuals, first-time home buyers, and people who want to take a risk on an old property at a low price.

An op-ed in the New York Times illustrates the value of super cheap home prices perfectly.

A couple (he an artist and her an architect) purchased a home in East Detroit for $1,900. The home was stripped of wiring and run down, but the couple saw that home as an opportunity to install green appliances and solar-powered utilities. They then purchased two other lots, installed a garden, sold a home to another artist couple at a $50 profit, and then called their friends (those who had bought the $100 home) to encourage them to move into the neighborhood.

Had Detroit bulldozed those properties, as the CLB is doing now, such innovation within existing structures would have been prevented.

I suppose the relevant question to ask is whether it is good public policy to prop up home prices by destroying the supply of very cheap homes and increasing the amount of land owned by government. Land banks throughout the United States (and NPR reporters) should take a closer look at the Saint Louis land bank. After all, the land bank here has existed for 40 years, and the situation has only gotten worse.

The post Is Bulldozing a Way to Prosperity? appeared first on Show-Me Institute.

When incentives enter the picture, so do an army of specialists, from consultants who help the projects qualify to brokers who turn the incentives into cash. A whole new layer of lawyers and bankers help work out the complicated financing of it all.

Taken together, these people form an industry, one that has flourished in St. Louis over the last decade. Thousands of skilled professionals have made good livings off the $3.5 billion in public money that cities and the state have poured into private real estate deals. And they regularly — and loudly — make themselves heard anytime someone tries to crimp the tap.

The businesses and individuals that directly profit from tax credit programs have a very strong incentive to maintain the status quo. For this reason, they are unlikely to approach tax credit reform measures seriously or substantively. Instead of implementing changes that limit the size of these programs, they will tend to support measures that expand and cement them.

They constitute quite a powerful lobby. This fact was quite obvious to me when I testified before the Tax Credit Review Commission in September at a regional meeting in Saint Louis. Except for me, every other person in who testified at that meeting spoke in support for a program that benefits them.

Again, from the Post-Dispatch:

The lobbying isn’t unusual. Every industry fights for its interests. But the real estate industry has more local clout than most — its bosses and workers all live here — and that, coupled with developers’ promises of jobs and investment, gives them a huge influence in city halls and the Missouri Capitol.

“Developers, bond counsels, retailers, consultants — they have got a powerful lobby between them,” said Les Sterman, former head of the East-West Gateway Council of Governments.

“The developers will fight you every chance they get,” [Sen. Tim Green] said. “Wouldn’t you fight it if the taxpayer pays for your development instead of you?”

In a sense, the proliferation of this army of specialists is a market response to government intervention. It can be amazing to see how markets evolve to address new economic niches, whatever their source.

As a negative consequence, however, this large administrative cost reduces the ability of the program to produce the intended activity efficiently. The Low-Income Housing Tax Credit is an egregious example of this. From a report issued in April 2008 by the Missouri state auditor’s office:

For every $1 in LIHTC authorized and issued, the current tax credit model provides only about $.35 towards the development of housing. The remaining $.65 goes to investors, syndication firms, and to the federal government in the form of increased taxes resulting from the use of state tax credits.

Supporters of tax credit programs might argue that this represents another form of job creation. However, these jobs are not permanent; they will disappear as soon as the subsidy ends. Additionally, these jobs specialize in unproductive activities. They exist largely because of government-created market inefficiency. If tax credit programs were reduced or eliminated, then the individuals currently working in these positions could put their knowledge, skills, and abilities to more productive uses. The economy would be better off if those resources were allocated instead to strong, profitable businesses that exist independent of subsidy.

The post “Wouldn’t You Fight It if the Taxpayer Pays for Your Development Instead of You?” appeared first on Show-Me Institute.

The quick growth, according to real estate data firm Clear Capital, was driven largely by sales that involved the $8,000 tax credit for first-time homebuyers. Many of the places where sale prices grew most are less-expensive Midwestern markets where $8,000 has a bigger impact.

This stimulus is artificial, and it will end as soon as the state and federal governments stop propping up housing prices with programs like this one.

Owning a home is suitable for those who can afford the investment commitment and associated risks. Nudging people into homes that they can’t afford has overwhelmingly negative consequences and could prolong the housing crisis or provoke another one.

Because this tax credit keeps housing prices artificially high, it defeats its ostensible intended purpose of nudging people into owning homes. As I have discussed previously, the rate of homeownership tends to remain constant over time in Saint Louis and elsewhere, despite the government’s nudging. Although this tax credit gives an individual the ability to make a larger down payment on a house, he or she will incur tens of thousands of dollars in additional debt by purchasing a house that is overpriced.

Furthermore, this tax credit program largely shifts transactions from the future to the present, instead of inciting new transactions to occur. Many of these beneficiaries would have purchased a home independent of the tax credit. This program is similar to sales tax holidays and last year’s cash for clunkers program in this regard.

Given that encouraging homeownership is such bad policy, why does government extend and introduce new programs? In an article in The Atlantic, Megan McArdle provides an answer (link via Audrey Spalding):

[P]oliticians want to help poor people with capital formation, and homeownership is the way that the American middle class has traditionally gone about capital formation.

Too bad that real estate is not a good investment!

The post Home Sweet Home? appeared first on Show-Me Institute.

[T]hey would like to see more state money directed to counseling and prevention, to help keep more people […] out of foreclosure. But with the tight state budget, they said a good first step would be a task force, to better organize and coordinate anti-foreclosure efforts, and to raise awareness of the problem.

It would be preferable if government stopped intervening in the housing market because then housing prices would return to their equilibrium level. The high foreclosure rate is yet another example of a government-created problem that would be better solved with less government, not more.

Throwing more state money at the problem is more likely to incite people to buy more expensive houses than they can afford than to reduce the rate of foreclosure. Programs that encourage homeownership already exist at practically every level in the government, but despite these programs, the rate of homeownership has remained steady over time. The $8,000 federal first-time home buyer tax incentive was recently extended, and there are additional ways in which Missouri homeowners can obtain financial assistance, such as a $1,250 tax incentive under the Missouri Homeowners Purchase Enhancement Program and additional incentives for energy-efficient home purchases or upgrades.

Is a task force really necessary “to raise awareness of the problem [of foreclosure?]” Last time I checked, everybody was well aware that the housing bubble burst.

When the government nudges individuals and families into homes that they may not want or be able to afford, the consequences are overwhelmingly negative. Missourians and Americans are better off when individuals live within their means, because fewer people will lose their homes, and fewer people will have to pay to keep others in theirs.

Owning a home may be preferable for some, but homeownership is not suited for all. There are financial and lifestyle factors to consider, and the government does not have enough information to know what is best for each individual and family. I know that homeownership is not for me. Although I am missing out on lucrative tax incentives from the state and federal governments, I choose to rent because it suits my lifestyle and budget better than owning. I have no desire to spend my time doing yard work, fixing things that break around the house, or cleaning guest bathrooms. Similarly, I don’t want to pay to repave a driveway, install new rain gutters, or have an insurance umbrella. I get much more utility from a new iPad than a new patio set. These are my preferences, which would be inappropriate to impose on others; similarly, it’s inappropriate for the government to set artificial incentives that encourage homeownership by individuals like me.

Additionally, encouraging homeownership over renting is poor policy. It could negatively affect the economic recovery, because it prevents workers from moving where the jobs are. Owning a home increases the cost of relocation because it ties an individual and his or her family to a geographic location. It is easier for a renter to relocate for a new job than for a homeowner to do so. Renters can relocate at the end of their lease or find a subletter, but homeowners have to sell their homes — a process that can take years.

Real estate is not a risk-free investment. I am reminded of an article that appeared last year in the Washington Post, “5 myths about home sweet homeownership,” in which Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, argues against the commonly held idea that homeownership is a investment with good returns and no risks.

Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year after inflation. You would have earned well over 2 percent per year after inflation had you invested in Treasury bills over the same period.

When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. With the possible exception of Treasury bonds, there is no such thing as a riskless investment. Unfortunately, real estate is all too often viewed as one. Buying a house is just like any other investment — there is a possibility that the purchaser will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). Thorough research and cost-benefit analysis are crucial before potential home buyers make what will be one of the largest financial decisions of their lives.

The post Emphasizing Homeownership Is Questionable Policy appeared first on Show-Me Institute.

After being relatively flat for much of the ‘80s and ‘90s, homeownership levels climbed several percentage points in the early 2000’s, peaking at 69 percent in 2004, according to the Census Bureau.

This rate for the United States was indeed flat during this period. However, the author does not disclose the fact the rate hovered around a mean of 64.7 percent between 1984 and 2000 — less than 3 percentage points lower than the peak in 2004. The rate increased only 5 points from 1994 and 2004, from 64 to 69 percent.

Additionally, the author restricted the vertical scale of the graph in a way that makes the increase over time seem large. Looking at an unrestricted version of the chart, this increase is not that significant.

I used annual homeownership rates by state and by metropolitan area data from the U.S. Census to produce the following graphs:

Click graphs to enlarge

Interestingly, the rates of homeownership in the state of Missouri and in the Saint Louis metropolitan area are higher than the rate in the United States. I suspect that this can be attributed to the fact that housing is plentiful and relatively inexpensive in Missouri, and perhaps also to a Midwestern lifestyle that encourages homeownership, among other factors.

Looking at all 50 states, although the homeownership rate for each falls within a range between 50 and 80 percent, there hasn’t been a significant change over time.

Programs that encourage homeownership exist at practically every level in the government. They include: homeownership assistance; property tax relief for new home buyers; homeownership vouchers; housing codes that restrict the number of units in a building; and, the recent federal tax credit for home buyers. However, despite this assistance, it appears that the rate of homeownership remains steady. If it weren’t for these programs, I wonder whether the rate of homeownership would be unaffected or whether it would decrease.

The post Despite Government’s Encouragement, Rate of Homeownership Remains Steady appeared first on Show-Me Institute.