Copyright 2008, Newsweek Inc. Usage:
May not be sold, electronically stored, or reproduced in any form without prior
written permission of Newsweek Inc. All commercial uses are prohibited. All
rights reserved.
In America we draw a connection between owning a home
and being a good citizen. We've evolved from a feudal society, in which those
who didn't own land were almost like slaves, to one in which homeownership is
linked to social mobility, as well as civic virtue. In 1835 Alexis de
Tocqueville wrote that America "stands alone" in the equality of distribution of
property and that "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." In fact, studies like one done by
Edward Glaeser at Harvard University and Bruce Sacerdote at Dartmouth have shown
that homeowners are indeed better citizens-they are more likely to vote in local
elections or to know the name of the head of the local school system. Speaking
to a group of people at the much-maligned Fannie Mae recently, I said that I
believed the work that they do contributes to the generally good feelings that
Americans have toward each other.
But what's ironic, as any classical economist would
tell you, is that homeownership is actually not a great idea from an investment
standpoint. A better strategy would be to diversify as much as possible-put your
money into stocks, bonds, many different geographies-and then use the income to
rent whatever you like, which allows for greater flexibility and efficiencies.
The popular argument that renting is equivalent to throwing money down the drain
is really fallacious, since the money you save can be invested to produce
dividends. Instead of you tinkering with the plumbing and breaking something, a
professional can do it. The lawn guy who has the right equipment can come and
mow all the lawns faster and better than individuals would, and so on.
Still, behavioral economics tells us that the
emotional lure of homeownership is strong and would be difficult to break
completely, even if that were desirable. I think that what's really needed at
this point is some restructuring of the model for homeownership. Let's allow
people to continue becoming homeowners, but find better ways to manage the risk
around these investments. Perhaps we need to reconsider some of the tax benefits
that encourage homeownership. We might also create new types of mortgages that
reset depending on the ability of people to pay. We could also elevate the
status of renting, by increasing the rights of renters relative to
landlords.
Broad home- and stock-ownership in the United States
and overseas is a good thing. But limits need to be set. To the extent that an
equity culture leads to entrepreneurship and investment and wealth creation, I'm
for it. But I was not, for example, in favor of George W. Bush's plan to
privatize Social Security. Can you imagine what would have happened to people
retiring today if that plan were in place? I like to think of capitalism as a
game. We need to make sure we structure the rules of the game in such a way that
we don't get injured while playing it.
Shiller is the Arthur M. Okun Professor of
Economics at Yale University and cofounder of MacroMarkets LCC. His most recent
book is "The Subprime Solution."
Credit: Shiller is the Arthur M. Okun Professor of
Economics at Yale University and cofounder of MacroMarkets LCC. His most recent
book is "The Subprime Solution."