I was struck by how comically bad this Josh Barro piece is today. Let’s count the ways.
Imagine if we bought food the way we buy housing.
Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.
People do something very much like this already. It’s called Community Supported Agriculture. But that’s an aside really.
Consider what happens when you change this analysis to dishes, which are much more similar to houses. Instead of simply paying per dish use, you buy dishes to give you rights to a stream of dish use in perpetuity. Is that weird? How about refrigerators or other appliances? How about furniture? Isn’t buying something for long-term use a very common practice for a category of things typically called “durable goods”?
We don’t actually need to change this analysis to dishes though. We can actually use housing services as a fitting analogy for housing services. Imagine, instead of renting sleeping, cooking, and entertaining space by the minute, people bought out whole time blocks of such space for a year at a time. Instead of renting a room each night at the hostel and an entertainment space every time they needed an entertainment space, they bought out an entire stream of these things for a full year. This would be really odd because, for large parts of every single day, they won’t even be using these facilities because they are at work. Sometimes they go out of town as well and fail to use the stream of housing services that they have purchased for days or even weeks at a time.
Why would anyone do such a thing? Aren’t apartment leases so stupid (edgy.jpg)?
People might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit.
This is called a “futures contract” and you can buy them in things called “commodities markets.” Chicago has one, I hear. More generally, people buy out streams of rents all the time that they don’t even want for any personal reason in the hopes of selling them later at a profit and enjoying dividends on them in the meantime. I hear there is a whole thing called the “financial system” set up for that purpose.
And because home equity is often the dominant form of investment for a middle-class family, people bet their economic fortunes on the residential real estate market where they live, rather than making the less volatile bet on the overall condition of the economy that comes from a balanced portfolio of stocks and bonds.
This is nothing more than an argument against small businesses, which is precisely what a homeowner is. What do small business owners do? They “bet their economic fortunes on the [consumer] market where they live, rather than making the less volatile bet on the overall condition of the economy that comes from a balanced portfolio of stocks and bonds.” Of course, there is economic literature that actually puzzles over why anyone ever puts up capital to start their own businesses and why entrepreneurs exist at all that uses precisely Barro’s reasoning here. But if he is going to make it, he should make it in its totality about all small business owners, not the small business owners who happen to be in the business of renting out housing services to themselves.
I am not even trying to tell people to be homeowners. But Barro is not making very interesting points here. He also does a poor job of explaining that the return on owning a home is not purely a function of how high its value increases, but also the stream of imputed rents. I can tell he understands this (and maybe he is just using some present value discounting to pretend those returns aren’t real, reasoning that makes all investments returnless), but he doesn’t communicate it very well. In any event, you don’t need your property values to increase significantly to make money renting buildings out to people, whether renting those buildings out to others (landlords) or renting them out to yourself (homeowners).