Shiller’s Confusing Thoughts On Homeownership

home under construction

Calculated Risk features a very confusing article in the NYT by economist Robert Shiller. He seems to argue both for and against government subsidization of housing and I can’t for the life of me figure out where he really comes down.

On the one hand he contends that economic theory would lead one to believe that the subsidies are of no use and then delves into some cultural arguments in favor of homeownership. Towards the end of the article he starts musing about building financial institutions that will lead ownership Nirvana. I kid you not, here is the concluding paragraph:

We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.

Maybe he has some investment product that he intends to flog and this is the opening gambit. I hope so, because the whole thing makes little sense. Frankly, I’m pretty disillusioned with the economics profession at this juncture and if they’re about to embark on a journey that mixes the pursuit of enhancing the human experience with conventional economics then I think we can pretty much discount their future advice.

As Calculated Risk points out there is an interesting debate in the midst of the pile Shiller creates. How do we indeed deal with the subsidies that drive real estate investment. Note, I’m not talking simply about homeownership but the overall favorable treatment that real estate enjoys in this country. The Calculated Risk author is I think correct in suggesting that changing current policy radically would be folly now and probably at any time. Gradual withdrawal should be the order of the day.

Personally, I favor ending the decades long support for this industry. It’s led to malinvestment in an asset class over and over, failed to fulfill its promise of financial security for buyers and created a cesspool of influence peddling in Washington. The tax deduction for owner occupied homes is highly regressive and encourages over investment. It’s a failed policy.

Having said that, don’t look for any change. Congress is mostly a captive of the industry and will willingly perpetuate the myth of homeownership.

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