This gets weirder in the context of regions with rapid cost increases. Are you five times wealthier than a decade ago, when nothing about your material lifestyle or ability to consume has actually changed? Is renting actually an option when rents are spiraling towards infinity and your wages are not? Is the occupant of a high-rise 2BR on Chicago's Gold Coast really such a pauper relative to the occupant of a studio in San Francisco's Mid-Market?
I think we'd have to say that "choosing not to move away" is a luxury that becomes increasingly lavish each year. You have to admit that is pretty unlike what a normal person is thinking about when they think about being wealthy. Perhaps it is the popular conception of wealth that's wrong, though.
This is a good article, but it's missing a second part of "What do we do about this to ensure that housing becomes (somewhat) more affordable". Anyone who's bought a house should know that it's 100% an asset (a form of wealth). My question is: how can we build more housing without having people believe that their biggest asset is going to crash in value? Because ultimately YIMBYism will have to win in the political arena and that means winning arguments.
Presumably having walls and a roof anywhere would satisfy the liability. But having control of the specific parcel of land it sits on seems like wealth to me. I think people would be pretty upset if their house got moved fully intact 50 miles away in a less desirable direction without compensation.
Hang on. Isn’t there a simpler response to the ‘count need for housing as a liability so it cancels out the wealth of ownership’ argument?
If we do this, then okay, owner-occupiers of a basic home with no other property or mortgage debt now have a net housing wealth of zero, but renters have a housing wealth of minus one unit of basic home’s worth, so they’re still less wealthy than the owner-occupiers by exactly the same amount as before.
Changing the zero point of the scale doesn’t change anyone’s relative positions. This doesn’t affect the long/short position debate, but that seems secondary to the core wealth-counting question.
"So if you own the exact amount of housing that you expect to use then your net asset position is neutral."
I think there's something weird about Brynjolfsson's claim here. The conditional might be strictly speaking true but as a home owner I don't own 'the exact amount of housing that I expect to use', I own a lot more. At some point, barring robot bodies or wild medical advances, I'll give up the ghost and have no more need of housing, but I will still own many many decades of housing surplus that will survive me. As a result my estate will contain the value of my house and my inheritors will get that wealth either in the form of decades of housing or cash. My net asset position seems then to have been far from neutral.
I don't think that's quite right -- and that's part of the challenge. Home ownership is a human dream. I live in Vietnam which is, let's just say, quite different socially, culturally, legally, and historically from America. But home ownership is very much the dream here, too.
And if we look at home ownership rates around the world[1] the US isn't even in the Top 50. Countries as diverse as Romania, Laos, Cuba, Nepal, Singapore, Brazil and Oman all have higher home ownership rates than the US.
If anything, the Anglo-sphere has surprisingly low homeownership rates given their wealth and government policies. Australia, Ireland, Canada, New Zealand, the UK, and the US all cluster within the 63-68% range which is kind of weird, actually.
All of this is just to say: I think solving this problem is going to be much, much harder than you (and other commentators on housing) suggest since it seems to fundamental to humanity. Don't get me wrong, it is a fight worth having and I'm 100% on your side. I've lived in America, Australia, and Vietnam and in all three dysfunctional housing markets seem like both the biggest problem and the least acted on by government.
And if you ask people for countries that don't have dysfunctional housing markets you basically get crickets. (Maaaaybe someone will say hey Japan isn't so bad I hear...people just take out 50-year mortgages there for fun, I guess.....At least the 100-year mortgages of the 1990s are a thing of the past!)
Hey Noah, I didn't say that housing is not wealth.
In fact I said it WAS wealth: Here's me tweeting to you about your alternative magic asset: "It's wealth that is balanced against your liability". Note the first two words.
I said that the claim that "housing is not wealth" was a garbled point; "a garbled point". However, I added "but it is true that we all have a housing liability — we need to live somewhere."
My goal was to help you see the more sensible point that those folks might be trying to make -- steelmanning their somewhat garbled argument to find the bit of it that was interesting and true Specifically, the more subtle, and correct point, is that if you have an asset (or wealth) exactly offset by a liability, then your net asset position not long or short in that asset class. In other words, you don't benefit from price rises in the asset and your not hurt by price declines.
This is the the case when you own exactly the amount of housing that you use -- you are indifferent to price changes in that asset class -- neither long nor short. In contract, if you own zero housing, then you are MORE exposed to the housing market than if you own the same amount of housing that you use. In fact, you are effectively short housing which is risky: you are hurt by relative price increases in that asset unlike the homeowner who has a neutral position. That's something most people don't realize, in my experience and worth noting. Do you get it?
I'm sorry that it seems I wasn't able to help you see that point on twitter. Maybe we can talk about it over a beer sometime.
If we're concerned about the role that home ownership plays in creating wealth inequality, why not simply tax away most or all capital gains that have accrued at the time a homeowner sells? Those gains are almost completely unearned. Why are we so protective of people's unearned windfalls?
Eliminate personal and corporate income taxes, tax the shit out of capital gains on everything. There, I've solved all our problems. You're welcome.
Dear Noah Smith, Absolutely, house is a wealth most people try to leave it as a bequeath to their children instead of cashing it in their life. If housing prices are rising and rents are not as you suggest, then a house owner can simply go to the bank, put his house in future's mortgage whereby, the bank would pay the house owner every month a fixed amount that increases with the increase in prices of housing. That steady income from the bank can continue till the house owner is alive and bank is paying him or her even after retirement. Assume that the house owner lives up till 80 years, he or she will get the fixed amount from the bank. Once the house owner passes away, the bank would own the house and sell it at the market price. In other words, house is a wealth that can be cashed not only at a younger age but is also the source of steady pension after retirement. The only downside is that house would not be left as a bequeath to the children.
For average Americans, home equity is a form of retirement savings. "Retirement savings" has nearly opposite connotations from "wealth."
Traditional "wealth" implies the ability to do without earned income in a situation where normal people work. But in our culture, a decent retirement ought to belong to everybody, and retirement savings come precisely because you have been working hard all the years you should.
So your retirement savings don't culturally count as being "a wealthy person." They don't go with having been able to work less than the standard working years, or being able to exceed your own prior standard of living.
To an economist, retirement savings are a perfectly normal kind of wealth, and retirement leisure is nearly the same as any other voluntary time off work. But culturally, smoothing consumption into retirement doesn't feel like "being wealthy." It feels like being safe and stable.
"Retirement savings count as wealth." Honestly, that's a sentence like "unemployment can't go to zero" or "controlling prices is bad." There are ideas that make perfect sense in economics, but no sense in popular culture.
But that's not the real strangeness here. The strange thing is American homeownership!
Why should Americans need homeownership for a secure retirement? It's dumb in theory and causes all kinds of trouble in practice. Unfortunately, it's hard to make that case, if the entry fee is claiming that homeownership is basically the same "wealth" as a Walton family inheritance. That just grinds against everything ordinary people read into "wealthy."
I'd like a good strong argument against America's weird fixation on homeownership. I suspect whether or not home equity is called "wealth" is just an irritating side issue.
I look forward to your real broadside against American homeownership culture!
Felix Salmon of Axios has a line that "everyone is born with a housing short they have to cover". Makes sense to me. And I have noticed as one becomes more 'adult' more sophisticated views of home ownership start to sink in.
But there is another aspect, if the gov't imposed a tax on Bitcoin and you had a lot of it but little real cash, you'd sell some of it to pay the tax. Grumbling, I'm sure, but it is what it is. Your home, however, you are emotionally attached too and there is a perspective if you spent decades in a community and paid off your mortgage, you not only own the home as an asset but you have an emotional asset in the connections to the community as well as that connection you may pass onto your kids.
Here the reality of change starts running into emotional economy. Imagine the older person who has paid off their home who sees real estate prices soar due to gentrification. On one hand this is a boon, they are 'sitting on a gold mine' if they ever want to cash out. On the other hand it starts creating some nasty emotional dynamics. If real estate taxes start going up, the pressure feels worse. They may be forced to sell and move despite the fact that long ago they 'paid for' the connections and home. Likewise kids may start seeing the house as less than a legacy of the family and more as a massive asset that the moment grandma drops dead will get sold and split.
These things are all real sources of concern for people and they tend to hit at the end of their economic lives when things like 'being dynamic' are the most hard.
There's also the question of *why* middle income people hold so much of their wealth in housing--why not rent and buy stocks instead? Part of the explanation would be that the returns to housing have been pretty good: firstly because the land use policies you mention restrict supply amid growing demand (raising prices) and secondly because the federal government subsidizes leverage by insuring mortgages and providing the mortgage interest rate deduction. Housing may be wealth, but we don't want voters to have an incentive to make it a lucrative investment.
As you say, having so much wealth (middle income wealth especially) in housing leads to bad land use (and tax) policy, but those bad policies lead to more wealth in housing. The question becomes: how do we break the cycle?
[Arguably we should be *dis*-incentivizing homeownership because it reduces mobility and leads to highly un-diversified portfolios for middle income people. I know that there are claims that homeowners are more invested in their communities, though I haven't seen much empirical evidence of that.]
This brings up an interesting side question. Why is it that (upper middle class) Americans are much more likely to invest in financial markets than their European equivalents? Do Europeans, except for the very wealthy, just put *all* of their money into the housing market? It might help explain their generally higher real estate costs compared to income.
Good article but I think it could be expanded in two sorts of avenues, which is that the way the median American thinks about housing is weird.
First, since housing is both a consumption good and an asset, people don't always try to maximize asset returns and instead for things that might make their consumption experience better (less traffic on the street, remodeling their bathroom). Second, Americans have a hard time separating the value of *Real Property* from the market price of a house, essentially not understanding fully that the land underneath the house has a separate value from the improvement sitting atop it. This, combined with the first idea, means that homeowners get weird ideas about "making sure the whole neighborhood is mowing their grass" or "remodeling the bathroom" being some of the best ways to get ROI on their home, instead of "add some businesses down the road and grow the town so my land gets more valuable".
Maybe this is just my axe to grind but I think this contributes to some of our collective bad ideas about housing.
This gets weirder in the context of regions with rapid cost increases. Are you five times wealthier than a decade ago, when nothing about your material lifestyle or ability to consume has actually changed? Is renting actually an option when rents are spiraling towards infinity and your wages are not? Is the occupant of a high-rise 2BR on Chicago's Gold Coast really such a pauper relative to the occupant of a studio in San Francisco's Mid-Market?
I think we'd have to say that "choosing not to move away" is a luxury that becomes increasingly lavish each year. You have to admit that is pretty unlike what a normal person is thinking about when they think about being wealthy. Perhaps it is the popular conception of wealth that's wrong, though.
This is a good article, but it's missing a second part of "What do we do about this to ensure that housing becomes (somewhat) more affordable". Anyone who's bought a house should know that it's 100% an asset (a form of wealth). My question is: how can we build more housing without having people believe that their biggest asset is going to crash in value? Because ultimately YIMBYism will have to win in the political arena and that means winning arguments.
Presumably having walls and a roof anywhere would satisfy the liability. But having control of the specific parcel of land it sits on seems like wealth to me. I think people would be pretty upset if their house got moved fully intact 50 miles away in a less desirable direction without compensation.
Hang on. Isn’t there a simpler response to the ‘count need for housing as a liability so it cancels out the wealth of ownership’ argument?
If we do this, then okay, owner-occupiers of a basic home with no other property or mortgage debt now have a net housing wealth of zero, but renters have a housing wealth of minus one unit of basic home’s worth, so they’re still less wealthy than the owner-occupiers by exactly the same amount as before.
Changing the zero point of the scale doesn’t change anyone’s relative positions. This doesn’t affect the long/short position debate, but that seems secondary to the core wealth-counting question.
I'd add that it's fairly easy to access at least part of this wealth via home equity loans.
"So if you own the exact amount of housing that you expect to use then your net asset position is neutral."
I think there's something weird about Brynjolfsson's claim here. The conditional might be strictly speaking true but as a home owner I don't own 'the exact amount of housing that I expect to use', I own a lot more. At some point, barring robot bodies or wild medical advances, I'll give up the ghost and have no more need of housing, but I will still own many many decades of housing surplus that will survive me. As a result my estate will contain the value of my house and my inheritors will get that wealth either in the form of decades of housing or cash. My net asset position seems then to have been far from neutral.
"homeownership is part of the American Dream"
I don't think that's quite right -- and that's part of the challenge. Home ownership is a human dream. I live in Vietnam which is, let's just say, quite different socially, culturally, legally, and historically from America. But home ownership is very much the dream here, too.
And if we look at home ownership rates around the world[1] the US isn't even in the Top 50. Countries as diverse as Romania, Laos, Cuba, Nepal, Singapore, Brazil and Oman all have higher home ownership rates than the US.
If anything, the Anglo-sphere has surprisingly low homeownership rates given their wealth and government policies. Australia, Ireland, Canada, New Zealand, the UK, and the US all cluster within the 63-68% range which is kind of weird, actually.
All of this is just to say: I think solving this problem is going to be much, much harder than you (and other commentators on housing) suggest since it seems to fundamental to humanity. Don't get me wrong, it is a fight worth having and I'm 100% on your side. I've lived in America, Australia, and Vietnam and in all three dysfunctional housing markets seem like both the biggest problem and the least acted on by government.
And if you ask people for countries that don't have dysfunctional housing markets you basically get crickets. (Maaaaybe someone will say hey Japan isn't so bad I hear...people just take out 50-year mortgages there for fun, I guess.....At least the 100-year mortgages of the 1990s are a thing of the past!)
[1]: https://en.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate
Hey Noah, I didn't say that housing is not wealth.
In fact I said it WAS wealth: Here's me tweeting to you about your alternative magic asset: "It's wealth that is balanced against your liability". Note the first two words.
I said that the claim that "housing is not wealth" was a garbled point; "a garbled point". However, I added "but it is true that we all have a housing liability — we need to live somewhere."
My goal was to help you see the more sensible point that those folks might be trying to make -- steelmanning their somewhat garbled argument to find the bit of it that was interesting and true Specifically, the more subtle, and correct point, is that if you have an asset (or wealth) exactly offset by a liability, then your net asset position not long or short in that asset class. In other words, you don't benefit from price rises in the asset and your not hurt by price declines.
This is the the case when you own exactly the amount of housing that you use -- you are indifferent to price changes in that asset class -- neither long nor short. In contract, if you own zero housing, then you are MORE exposed to the housing market than if you own the same amount of housing that you use. In fact, you are effectively short housing which is risky: you are hurt by relative price increases in that asset unlike the homeowner who has a neutral position. That's something most people don't realize, in my experience and worth noting. Do you get it?
I'm sorry that it seems I wasn't able to help you see that point on twitter. Maybe we can talk about it over a beer sometime.
If we're concerned about the role that home ownership plays in creating wealth inequality, why not simply tax away most or all capital gains that have accrued at the time a homeowner sells? Those gains are almost completely unearned. Why are we so protective of people's unearned windfalls?
Eliminate personal and corporate income taxes, tax the shit out of capital gains on everything. There, I've solved all our problems. You're welcome.
Dear Noah Smith, Absolutely, house is a wealth most people try to leave it as a bequeath to their children instead of cashing it in their life. If housing prices are rising and rents are not as you suggest, then a house owner can simply go to the bank, put his house in future's mortgage whereby, the bank would pay the house owner every month a fixed amount that increases with the increase in prices of housing. That steady income from the bank can continue till the house owner is alive and bank is paying him or her even after retirement. Assume that the house owner lives up till 80 years, he or she will get the fixed amount from the bank. Once the house owner passes away, the bank would own the house and sell it at the market price. In other words, house is a wealth that can be cashed not only at a younger age but is also the source of steady pension after retirement. The only downside is that house would not be left as a bequeath to the children.
For average Americans, home equity is a form of retirement savings. "Retirement savings" has nearly opposite connotations from "wealth."
Traditional "wealth" implies the ability to do without earned income in a situation where normal people work. But in our culture, a decent retirement ought to belong to everybody, and retirement savings come precisely because you have been working hard all the years you should.
So your retirement savings don't culturally count as being "a wealthy person." They don't go with having been able to work less than the standard working years, or being able to exceed your own prior standard of living.
To an economist, retirement savings are a perfectly normal kind of wealth, and retirement leisure is nearly the same as any other voluntary time off work. But culturally, smoothing consumption into retirement doesn't feel like "being wealthy." It feels like being safe and stable.
"Retirement savings count as wealth." Honestly, that's a sentence like "unemployment can't go to zero" or "controlling prices is bad." There are ideas that make perfect sense in economics, but no sense in popular culture.
But that's not the real strangeness here. The strange thing is American homeownership!
Why should Americans need homeownership for a secure retirement? It's dumb in theory and causes all kinds of trouble in practice. Unfortunately, it's hard to make that case, if the entry fee is claiming that homeownership is basically the same "wealth" as a Walton family inheritance. That just grinds against everything ordinary people read into "wealthy."
I'd like a good strong argument against America's weird fixation on homeownership. I suspect whether or not home equity is called "wealth" is just an irritating side issue.
I look forward to your real broadside against American homeownership culture!
Felix Salmon of Axios has a line that "everyone is born with a housing short they have to cover". Makes sense to me. And I have noticed as one becomes more 'adult' more sophisticated views of home ownership start to sink in.
But there is another aspect, if the gov't imposed a tax on Bitcoin and you had a lot of it but little real cash, you'd sell some of it to pay the tax. Grumbling, I'm sure, but it is what it is. Your home, however, you are emotionally attached too and there is a perspective if you spent decades in a community and paid off your mortgage, you not only own the home as an asset but you have an emotional asset in the connections to the community as well as that connection you may pass onto your kids.
Here the reality of change starts running into emotional economy. Imagine the older person who has paid off their home who sees real estate prices soar due to gentrification. On one hand this is a boon, they are 'sitting on a gold mine' if they ever want to cash out. On the other hand it starts creating some nasty emotional dynamics. If real estate taxes start going up, the pressure feels worse. They may be forced to sell and move despite the fact that long ago they 'paid for' the connections and home. Likewise kids may start seeing the house as less than a legacy of the family and more as a massive asset that the moment grandma drops dead will get sold and split.
These things are all real sources of concern for people and they tend to hit at the end of their economic lives when things like 'being dynamic' are the most hard.
There's also the question of *why* middle income people hold so much of their wealth in housing--why not rent and buy stocks instead? Part of the explanation would be that the returns to housing have been pretty good: firstly because the land use policies you mention restrict supply amid growing demand (raising prices) and secondly because the federal government subsidizes leverage by insuring mortgages and providing the mortgage interest rate deduction. Housing may be wealth, but we don't want voters to have an incentive to make it a lucrative investment.
As you say, having so much wealth (middle income wealth especially) in housing leads to bad land use (and tax) policy, but those bad policies lead to more wealth in housing. The question becomes: how do we break the cycle?
[Arguably we should be *dis*-incentivizing homeownership because it reduces mobility and leads to highly un-diversified portfolios for middle income people. I know that there are claims that homeowners are more invested in their communities, though I haven't seen much empirical evidence of that.]
This brings up an interesting side question. Why is it that (upper middle class) Americans are much more likely to invest in financial markets than their European equivalents? Do Europeans, except for the very wealthy, just put *all* of their money into the housing market? It might help explain their generally higher real estate costs compared to income.
I'm shocked that there are people who don't recognise housing is a form of wealth.
Is this a thing that people who don't own a house forget and people who rent are super aware of?
Good article but I think it could be expanded in two sorts of avenues, which is that the way the median American thinks about housing is weird.
First, since housing is both a consumption good and an asset, people don't always try to maximize asset returns and instead for things that might make their consumption experience better (less traffic on the street, remodeling their bathroom). Second, Americans have a hard time separating the value of *Real Property* from the market price of a house, essentially not understanding fully that the land underneath the house has a separate value from the improvement sitting atop it. This, combined with the first idea, means that homeowners get weird ideas about "making sure the whole neighborhood is mowing their grass" or "remodeling the bathroom" being some of the best ways to get ROI on their home, instead of "add some businesses down the road and grow the town so my land gets more valuable".
Maybe this is just my axe to grind but I think this contributes to some of our collective bad ideas about housing.