landlord

What if everyone owned their own home?

pnrj current events, public policy , , , , , , , , ,

Mar 14 JDN 2459288

In last week’s post I suggested that if we are to use the term “gentrification”, it should specifically apply to the practice of buying homes for the purpose of renting them out.

But don’t people need to be able to rent homes? Surely we couldn’t have a system where everyone always owned their own home?

Or could we?

The usual argument for why renting is necessary is that people don’t want to commit to living in one spot for 15 or 30 years, the length of a mortgage. And this is quite reasonable; very few careers today offer the kind of stability that lets you commit in advance to 15 or more years of working in the same place. (Tenured professors are one of the few exceptions, and I dare say this has given academic economists some severe blind spots regarding the costs and risks involved in changing jobs.)

But how much does renting really help with this? One does not rent a home for a few days or even few weeks at a time. If you are staying somewhere for an interval that short, you generally room with a friend or pay for a hotel. (Or get an AirBNB, which is sort of intermediate between the two.)

One only rents housing for months at a time—in fact, most leases are 12-month leases. But since the average time to sell a house is 60-90 days, in what sense is renting actually less of a commitment than buying? It feels like less of a commitment to most people—but I’m not sure it really is less of a commitment.

There is a certainty that comes with renting—you know that once your lease is up you’re free to leave, whereas selling your house will on average take two or three months, but could very well be faster or slower than that.

Another potential advantage of renting is that you have a landlord who is responsible for maintaining the property. But this advantage is greatly overstated: First of all, if they don’t do it (and many surely don’t), you actually have very little recourse in practice. Moreover, if you own your own home, you don’t actually have to do all the work yourself; you could pay carpenters and plumbers and electricians to do it for you—which is all that most landlords were going to do anyway.

All of the “additional costs” of owning over renting such as maintenance and property taxes are going to be factored into your rent in the first place. This is a good argument for recognizing that a $1000 mortgage payment is not equivalent to a $1000 rent payment—the rent payment is all-inclusive in a way the mortgage is not. But it isn’t a good argument for renting over buying in general.

Being foreclosed on a mortgage is a terrible experience—but surely no worse than being evicted from a rental. If anything, foreclosure is probably not as bad, because you can essentially only be foreclosed for nonpayment, since the bank only owns the loan; landlords can and do evict people for all sorts of reasons, because they own the home. In particular, you can’t be foreclosed for annoying your neighbors or damaging the property. If you own your home, you can cut a hole in a wall any time you like. (Not saying you should necessarily—just that you can, and nobody can take your home away for doing so.)

I think the primary reason that people rent instead of buying is the cost of a down payment. For some reason, we have decided as a society that you should be expected to pay 10%-20% of the cost of a home up front, or else you never deserve to earn any equity in your home whatsoever. This is one of many ways that being rich makes it easier to get richer—but it is probably the most important one holding back most of the middle class of the First World.

And make no mistake, that’s what this is: It’s a social norm. There is no deep economic reason why a down payment needs to be anything in particular—or even why down payments in general are necessary.

There is some evidence that higher down payments are associated with less risk of default, but it’s not as strong as many people seem to think. The big HUD study on the subject found that one percentage point of down payment reduces default risk by about as much as 5 points of credit rating: So you should prefer to offer a mortgage to someone with an 800 rating and no down payment than someone with a 650 rating and a 20% down payment.

Also, it’s not as if mortgage lenders are unprotected from default (unlike, say, credit card lenders). Above all, they can foreclose on the house. So why is it so important to reduce the risk of default in the first place? Why do you need extra collateral in the form of a down payment, when you’ve already got an entire house of collateral?

It may be that this is actually a good opportunity for financial innovation, a phrase that should in general strike terror in one’s heart. Most of the time “financial innovation” means “clever ways of disguising fraud”. Previous attempts at “innovating” mortgages have resulted in such monstrosities as “interest-only mortgages” (a literal oxymoron, since by definition a mortgage must have a termination date—a date at which the debt “dies”), “balloon payments”, and “adjustable rate mortgages”—all of which increase risk of default while as far as I can tell accomplishing absolutely nothing. “Subprime” lending created many excuses for irresponsible or outright predatory lending—and then, above all, securitization of mortgages allowed banks to offload the risk they had taken on to third parties who typically had no idea what they were getting.

Volcker was too generous when he said that the last great financial innovation was the ATM; no, that was an innovation in electronics (and we’ve had plenty of those). The last great financial innovation I can think of is the joint-stock corporation in the 1550s. But I think a new type of mortgage contract that minimizes default risk without requiring large up-front payments might actually qualify as a useful form of financial innovation.

It would also be useful to have mortgages that make it easier to move, perhaps by putting payments on hold while the home is up for sale. That way people wouldn’t have to make two mortgage payments at once as they move from one place to another, and the bank will see that money eventually—paid for by new buyer and their mortgage.

Indeed, ideally I’d like to eliminate foreclosure as well, so that no one has to be kicked out of their homes. How might we do that?

Well, as a pandemic response measure, we should have simply instituted a freeze on all evictions and foreclosures for the duration of the pandemic. Some states did, in fact—but many didn’t, and the federal moratoria on evictions were limited. This is the kind of emergency power that government should have, to protect people from a disaster. So far it appears that the number of evictions was effectively reduced from tens of millions to tens of thousands by these measures—but evicting anyone during a pandemic is a human rights violation.

But as a long-term policy, simply banning evictions wouldn’t work. No one would want to lend out mortgages, knowing that they had no recourse if the debtor stopped paying. Even buyers with good credit might get excluded from the market, since once they actually received the house they’d have very little incentive to actually make their payments on time.

But if there are no down payments and no foreclosures, that means mortgage lenders have no collateral. How are they supposed to avoid defaults?

One option would be wage garnishment. If you have the money and are simply refusing to pay it, the courts could simply require your employer to send the money directly to your creditors. If you have other assets, those could be garnished as well.

And what if you don’t have the money, perhaps because you’re unemployed? Well, then, this isn’t really a problem of incentives at all. It isn’t that you’re choosing not to pay, it’s that you can’t pay. Taking away such people’s homes would protect banks financially, but at a grave human cost.

One option would be to simply say that the banks should have to bear the risk: That’s part of what their huge profits are supposed to be compensating them for, the willingness to take on risks others won’t. The main downside here is the fact that it would probably make it more difficult to get a mortgage and raise the interest rates that you would need to pay once you do.

Another option would be some sort of government program to make up the difference, by offering grants or guaranteed loans to homeowners who can’t afford to pay their mortgages. Since most such instances are likely to be temporary, the government wouldn’t be on the hook forever—just long enough for people to get back on their feet. Here the downside would be the same as any government spending: higher taxes or larger budget deficits. But honestly it probably wouldn’t take all that much; while the total value of all mortgages is very large, only a small portion are in default at any give time. Typically only about 2-4% of all mortgages in the US are in default. Even 4% of the $10 trillion total value of all US mortgages is about $400 billion, which sounds like a lot—but the government wouldn’t owe that full amount, just whatever portion is actually late. I couldn’t easily find figures on that, but I’d be surprised if it’s more than 10% of the total value of these mortgages that would need to be paid by the government. $40 billion is about 1% of the annual federal budget.

Reforms to our healthcare system would also help tremendously, as medical expenses are a leading cause of foreclosure in the United States (and literally nowhere else—every other country with the medical technology to make medicine this expensive also has a healthcare system that shares the burden). Here there is virtually no downside: Our healthcare system is ludicrously expensive without producing outcomes any better than the much cheaper single-payer systems in Canada, the UK, and France.

All of this sounds difficult and complicated, I suppose. Some may think that it’s not worth it. But I believe that there is a very strong moral argument for universal homeownership and ending eviction: Your home is your own, and no one else’s. No one has a right to take your home away from you.

This is also fundamentally capitalist: It is the private ownership of capital by its users, the acquisition of wealth through ownership of assets. The system of landlords and renters honestly doesn’t seem so much capitalist as it does feudal: We even call them “lords”, for goodness’ sake!

As an added bonus, if everyone owned their own homes, then perhaps we wouldn’t have to worry about “gentrification”, since rising property values would always benefit residents.

What if you couldn’t own land?

pnrj core principles, public policy , , , , , , , , , , , , , , , , , , , ,

JDN 2457145 EDT 20:49.

Today’s post we’re on the socialism scale somewhere near the The Guess Who, but not quite all the way to John Lennon. I’d like to questions one of the fundamental tenets of modern capitalism, but not the basic concept of private ownership itself:

What if you couldn’t own land?

Many things that you can own were more-or-less straightforwardly created by someone. A car, a computer, a television, a pair of shoes; for today let’s even take for granted intellectual property like books, movies, and songs; at least those things (“things”) were actually made by someone.

But land? We’re talking about chunks of the Earth here. They were here billions of years before us, and in all probability will be here billions of years after we’re gone. There’s no need to incentivize its creation; the vast majority of land was already here and did not need to be created. (I do have to say “the vast majority”, because in places like Japan, Hong Kong, and the Netherlands real estate has become so scarce that people do literally build land out into the sea. But this is something like 0.0001% of the world’s land.)

What we want to incentivize is land development; we want it to be profitable to build buildings and irrigate deserts, and yes, even cut down forests sometimes (though then there should be a carbon tax with credits for forested land to ensure that there isn’t too much incentive). Yet our current property tax system doesn’t do this very well; if you build bigger buildings, you end up paying more property taxes. Yes, you may also make some profit on the buildings—but it’s risky, and you may not get enough benefit to justify the added property taxes.

Moreover, we want to allocate land—we want some way of deciding who is allowed to use what land where and when (and perhaps why). Allowing land to be bought and sold is one way to do that, but it is not the only way.

Indeed, land ownership suffers from a couple of truly glaring flaws as an allocation system:

      1. It creates self-perpetuating inequality. Because land grows in value over time (due to population growth and urbanization, among other things), those who currently own land end up getting an ever-growing quantity of wealth while those who do not own land do not, and very likely end up having to pay ever-growing rents to the landlords. (I like calling them “landlords”; it really drives home the fact that our landholding system is still basically the same as it was under feudalism.) In fact, the recent rise in the share of income that goes to owners of capital rather than workers is almost entirely attributable to the rise in the price of real estate. As that post rightly recognizes, this does nothing to undermine Piketty’s central message of rising inequality due to capital income (pace The Washington Post); it merely tells us to focus on real estate instead of other forms of capital.
      2. It has no non-arbitrary allocation. If we want to decide who owns a car, we can ask questions like, “Who built it? Did someone buy it from them? Did they pay a fair price?”; if we want to decide who owns a book, we can ask questions like, “Who wrote it? Did they sell it to a publisher? What was the royalty rate?” That is, there is a clear original owner, and there is a sense of whether the transfer of ownership can be considered fair. But if we want to decide who owns a chunk of land, basically all we can ask is, “What does the deed say?” The owner is the owner because they are the owner; there’s no sense in which that ownership is fair. We certainly can’t go back to the original creation of the land, because that was due to natural forces gigayears ago. If we keep tracing the ownership backward, we will eventually end up with some guy (almost certainly a man, a White man in fact) with a gun who pointed that gun at other people and said, “This is mine.” This is true of basically all the land in the world (aside from those little bits of Japan and such); it was already there, and the only reason someone got to own it was because they said so and had a bigger gun. And a flag, perhaps: “Do you have a flag?” I suppose, in theory at least, there are a few ways of allocating land which seem less arbitrary: One would be to give everyone an equal amount. But this is practically very difficult: What do you do when the population changes? If you have 2% annual population growth, do you carve off 2% of everybody’s lot each year? Another would be to let people squat land, and automatically own the land that they live on—but again practical difficulties quickly become enormous. In any case, these two methods bear about as much resemblance to our actual allocation of land as a squirrel does to a Tyrannosaurus.

So, what else might we use? The system that makes the most sense to me is that we would own all land as a society. In practical terms this would mean that all land is Federal land, and if you want to use it for something, you need to pay rent to the government. There are many different ways the government could set the rent, but the most sensible might be to charge a flat rate per hectare regardless of where the land is or what it’s being used for, because that would maximize the incentive to develop the land. It would also make the rent fall entirely on the landowner, because the rent would be perfectly inelastic—meaning that you can’t change the quantity you make based on the price, because you aren’t making it; it’s just already sitting there.

Of course, this idea is obviously politically impossible in our current environment—or indeed any foreseeable political environment. I’m just fantasizing here, right?

Well, not quite. There is one thing we could do that would be economically quite similar to government-only land ownership; it’s called a land tax. The idea is incredibly simple: you just collect a flat tax per hectare of land. Economists have known that a land tax is efficient at providing revenue and reducing inequality since at least Adam Smith. So maybe ownership of land isn’t actually foundational to capitalism, after all; maybe we’ve just never fully gotten over feudalism. (I basically agree with Adam Smith, and for doing so I am often called a socialist.) The beautiful thing about a land tax is that it has a tax incidence in which the owners of the land end up bearing the full brunt of the tax.

Tax incidence is something it’s very important to understand; it would be on my list of the top ten economic principles that people should learn. We often have fierce political debates over who will actually write the check: Should employers pay the health insurance premium, or should employees? Will buyers pay sales tax, or sellers? Should we tax corporate profits or personal capital gains?

Please understand that I am not exaggerating when I say that these sorts of questions are totally irrelevant. It simply does not matter who actually writes the check; what matters is who bears the cost. Making the employer pay the health insurance premium doesn’t make the slightest difference if all they’re going to do is cut wages by the exact same amount. You can see the irrelevance of the fact that sellers pay sales tax every time you walk into a store—you always end up paying the price plus the tax, don’t you? (I found that the base price of most items was the same between Long Beach and Ann Arbor, but my total expenditure was always 3% more because of the 9% sales tax versus the 6%.) How do we determine who actually pays the tax? It depends on the elasticity—how easily can you change your behavior in order to avoid the tax? Can you find a different job because the health insurance premiums are too high? No? Then you’re probably paying that premium, even if your employer writes the check. If you can find a new job whenever you want, your employer might have to pay it for you even if you write the check.

The incidence of corporate taxes and taxes on capital gains are even more complicated, because it could affect the behavior of corporations in many different ways; indeed, many economists argue that the corporate tax simply results in higher unemployment or lower wages for workers. I don’t think that’s actually true, but I honestly can’t rule it out completely, precisely because corporate taxes are so complicated. You need to know all sorts of things about the structure of stock markets, and the freedom of trade, and the mobility of immigration… it’s a complete and total mess.

It’s because of tax incidence that a land tax makes so much sense; there’s no way for the landowner to escape it, other than giving up the land entirely. In particular, they can’t charge more for rent without being out-competed (unless landowners are really good at colluding—which might be true for large developers, but not individual landlords). Their elasticity is so low that they’re forced to bear the full cost of the tax.

If the land tax were high enough, it could eliminate the automatic growth in wealth that comes from holding land, and thereby reducing long-run inequality dramatically. The revenue could be used for my other favorite fiscal policy, the basic income—and real estate is a big enough part of our nation’s wealth that it’s actually entirely realistic to fund an $8,000 per person per year basic income entirely on land tax revenue. The total value of US land is about $14 trillion, and an $8,000 basic income for 320 million people would cost about $2.6 trillion; that’s only 19%. You’d actually want to make it a flat tax per hectare, so how much would that be? Well, 60% of US land is privately owned at present (no sense taxing the land the government already owns), and total US land area is about 9 million square kilometers, so to raise $2.5 trillion you’d need a tax of $289,000 per square kilometer, or $2,890 per hectare. If you own a hectare—which is bigger than most single-family lots—you’d only pay $2,890 per year in land tax, well within what most middle-class families could handle. But if you own 290,000 acres like Jeff Bezos, (that’s 117,000 hectares) you’re paying $338 million per year. Since Jeff Bezos has about $38 billion in net wealth, he can actually afford to pay that ($338 million per year is about one-tenth of what Jeff Bezos makes automatically on dividends), though he might consider selling off some of the land to avoid the taxes, which is exactly the sort of incentive we wanted to create.

Indeed, when I contemplate this policy I’m struck by the fact that it has basically no downside—usually in public policy you’re forced to make hard compromises and tradeoffs, but a land tax plus basic income is a system that carries almost no downsides at all. It won’t disincentivize investment, it won’t disincentivize working, it will dramatically reduce inequality, it will save the government a great deal of money on social welfare spending, and best of all it will eliminate poverty immediately and forever. The only people it would hurt at all are extremely rich, and they wouldn’t even be hurt very much, while it would benefit millions of people including some of the most needy.

Why aren’t we doing this already!?