The Downsides of Widespread Homeownership; Have Americans Overinvested in Housing? Probably

From the Richmond Fed article "House Bias: The Economic Consequences of Subsidizing Homeownership":

The homeownership rate is about 68% now (see chart above). Perhaps the best policy question is no longer why the homeownership rate in the United States is so low. A question that economists might ponder instead is: Why should we want the homeownership rate to be so high?

The Downsides of Widespread Homeownership

1. The current policies produce an economy in which housing investment is generally higher than it would be if government didn’t favor it. Simply put, Americans may have overinvested in housing. And every dollar that is invested in housing stock is a dollar not invested in a more productive use elsewhere. That results in a net reduction in overall economic efficiency.

2. It's not clear that using a home purchase as a primary vehicle for a family’s investment is sound financial advice. Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that “from 1890 through 1990, the return on residential real estate was just about zero after inflation.” Throw in the costs of maintenance of the property and it’s easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments — the foregone investment opportunities elsewhere — go largely unseen.

3. The costs of owning a home go beyond the financial commitments too. Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating. After all, terminating a lease is much less costly and time-consuming than foreclosing on a house or selling a home, even if the owner breaks even on the transaction. Economists predict this would lead to a decline in “labor mobility,” the ability for people to move to where the jobs are.

4. Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.

HT: Tyler Cowen