«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»
Finally, I turn to social capital investments, which I define as investments that affect the quality of the neighborhood but not the neighborhood’s structure. One way to view these investments is that they require time but not money and only the residents can make them. These investments may also create externalities. In general, equation (1) continues to hold and I should expect to see more investments from homeowners than from renters, both because homeowners internalize the benefits of future price increases and because they do not lose from increases in rents. These increased investments provide one justification for the correlations between homeownership and social capital found by DiPasquale and Glaeser (1999) and others.
∞ Another question is whether structure or individual characteristics will connect with these ∞ investments. For example, it is natural∞to assume that both benefits and the costs of investment are a function of the size of∞the building. It might be easier to connect with others in large, dense ∞ structures, in which case T might be declining with U. Alternatively, the benefits of social capital ∞ might be lower or higher in denser areas. Social capital may be less valuable if people are more ∞
(a) Holding building structure constant, investment in social capital is always higher in owneroccupied than in rental properties, and if f (m) is uniform, then the increased investment associated with owner-occupancy is rising with building size (U) if and only if the time costs of investing in social capital decline with building size ( ).
(b) If renters occupy larger buildings, then homeowners may invest less in social capital if the time costs of investing in social capital decline sufficiently with building size (that is, if is sufficiently negative).
The author acknowledges the Taubman Center for State and Local Government for supporting this work. Kristina Tobio provided superb research assistance.
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Abstract The United States has long exhibited enthusiasm for homeownership. The converse of
this is that it has tended to neglect rental housing. This article seeks to do the following:
(1) explain why rental housing is desirable; (2) lay out the policies that favor owneroccupied housing; (3) discuss current subsidy programs for rental housing, with particular emphasis on programs that are not simply legacies of past policy; and (4) examine how these programs might be improved or reformed. It argues that in a second-best world of restrictive zoning and preferences for ownership, rental subsidies may be justified on both equity and efficiency grounds.
Introduction If anything shows how research and policy have neglected rental housing, it is a search of the words “rental housing” on scholar.google.com. Of the 10 most cited studies on this issue, the youngest is 10 years old, 5 are from the 1980s, and 4 are from the 1970s. And it is not as if more recent papers will catch up soon—the 10th most cited paper has been cited only 34 times.
Yet rental housing is a big deal. The 2007 American Housing Survey (AHS) shows that 35 million households lived in rental housing in that year, housing 81 million people. The events of the past 2 years have made renter housing more important, because many households that were foreclosed upon have been forced to move into rental housing. For mobile people who do not want to bear the fixed costs of owning and busy people who do not want to bear the management cost of owning, rental housing is an important option.
The neglect of rental housing is the natural product of America’s obsession with owner-occupied
housing. This obsession goes back at least as far as de Tocqueville (de Tocqueville, 1835: 231):
Nations are less disposed to make revolutions in proportion as personal property is augmented and distributed amongst them, and as the number of those possessing it increases.
The reverse of the American embrace of owner housing has been hostility toward rental housing in general and apartments in particular.
This article argues that in a second-best world, one in which the federal government provides substantial benefits to owners and local zoning is often hostile to renters, rental subsidies may be appropriate on both equity and efficiency grounds.
Not all rental subsidies are created equal, however. Rent control is inefficient and often inequitable.
Tax credits may encourage low-rent housing in places it is least needed and may be very “leaky”;
that is, a large share of the subsidy does not find its way to renters. The Section 8 Housing Choice Voucher Program (vouchers) provides the most promising form of rental assistance, but, because it is not an entitlement, its may produce perverse results.
This article seeks to do the following: (1) explain why rental housing is desirable; (2) lay out the policies that favor owner-occupied housing; (3) discuss current subsidy programs for rental housing, with a particular emphasis on programs that are not simply legacies of past policy; and (4) examine how these programs might be improved or reformed.
Why Rental Housing Is Desirable Rental housing can be better for some households than owner-occupied housing for a few reasons.
• Is compatible with labor mobility.
• Allows for households that wish to invest in something other than housing to do so.
• Generally allows for the provision of safe, sanitary housing while reducing the risk and perhaps the cash-flow cost of such housing to dwellers.
This section discusses each of these points briefly. When making a decision between owning and renting, a household might perform a financial calculation regarding which form of tenure minimizes housing costs. Although housing costs are generally addressed in terms of cash-flow costs (discussed later in the article), they also need to be addressed in terms of fixed costs––the fixed costs involved in purchasing a home are inevitably higher than they are for renting.
The reason for this disparity is the nature of the transaction: owners need to know their tenure is secure in perpetuity (or something close to it), and lenders that finance owner-occupied housing need to perform due diligence to make sure their loans are well collateralized. This due diligence imposes fixed costs in the forms of downpayment, title insurance, and loan origination costs on owners that do not exist for renters. The buyer-seller transaction is also more likely to go through a broker than is a landlord-renter transaction.1 Moreover, homeowners bear these types of fixed costs both when purchasing and selling a house. These costs produce a friction that is much larger than in the rental market.2 Brokers are usually involved in commercial real estate leases, but are less involved in apartment/house leases.
A landlord must perform due diligence as well, but not to the same degree as a lender or a title insurance company. If a landlord makes a mistake, he or she loses a few months’ rent; if a lender or title insurance company makes a mistake, their potential losses are considerably larger.
Homeownership is often sold as a method that enables households—particularly low-income households––to accumulate wealth. This argument has some appeal, because an amortizing mortgage allows households to save and consume simultaneously.
Ownership, however, is surely not the only mechanism available for the poor to begin wealth accumulation. To the extent homebuyers must place equity into a house they will purchase (and loans with 100-percent loan-to-value ratios will be absent for awhile), they will have fewer savings to invest elsewhere. This absence of saving for other investment is not necessarily optimal for either households or the broader economy. Scholars such as Mills (1987), Hendershott (1997), and Taylor (1998) have argued that capital that has flowed out of plant and equipment and into housing has cost the United States productivity and, therefore, Gross Domestic Product.
Finally, regarding cash-flow affordability, consider that owners and renters both pay rent—the difference for renters is that the amount they pay is transparent, whereas, for owners, it is not; hence, for owners, it is called “imputed rent.” In equilibrium, however, the marginal renter must pay the same rent for a house of a particular quality as the marginal owner. This equilibrium condition helps explain why the cash-flow cost of renting is likely lower for renters than it is for owners.
Consider two dwelling units that are identical, except for the tenure of their residents. From the perspective of the landlord, she must earn a total return that is equal to the opportunity cost of her capital (OCC), or the amount she could earn on an investment with comparable risk to housing.