Monday, June 23, 2008

No time to blog, but hey, it's homeownership!

With regard to Mark Thoma's June 23rd post, "Paul Krugman: Home Not-So-Sweet Home", there's really a lot I'd like to say, but I'll have to restrain myself. The fact is, I got into blogging largely because I was hired to design and run a personal finance website for the University of Arizona and thought knowledge of blogging would help, especially for inexpensive promotion. It's been great, but alas, at this point in my academic and business careers, I can't justify spending much time at it.

That said, some quick but I think important things regarding this post:

First, I promote it a lot, but I think my brief working article, "Let's Cut the Ammunition to the Housing Arms Race Permanently", really explains well some of the best things we can do to help homeowners over the long run.

Second, one of the most important things in deciding whether the government should promote something is whether it produces net positive externalities (and how much). I think home ownership does have large net positive externalities, but only for people in certain situations, not for all people in all situations. So government promotion of homeownership could be efficiency and welfare enhancing – if well designed.

Third, a huge issue which could really change things in as little as the next 10 or 20 years is advances in video conferencing and other telecommunications. It's possible that in 10 or 20 years video conferencing could get so good that 25% to over 50% of skilled jobs could be done from anywhere. You could imagine say business managers or engineers communicating with each other via life-size ultra-high resolution monitors with an array of extremely accurate computer controlled mobile cameras and microphones. And you could imagine this and much more amazing telecom equipment being relatively inexpensive.

At that point, many or most skilled people could do their jobs from home anywhere, in Oak Park, Michigan, Podunk, Nebraska, anywhere. And if they didn't want to work at home, they could work in a Kinkos rent-an-office, or small satellite office, or complex, anywhere. When this happens it will really change society. It will make it so that homeownership makes sense for many more people, as you typically have to live in a home for at least 3-5 years without moving for it to make economic sense. Extended families will be able to stay together, rather than parents having to move far from their parents, siblings, and old friends for work. There will be a great savings in energy and decreases in pollution. The implications are huge. This is certainly something academics should be studying heavily for many reasons, one of which is, with the great net positive externalities, how, and how much, should the government be supporting this, the advancement of these telecom technologies.

Fourth, a really common misconception regarding homeownership, that I even heard once from a top finance professor, is that a benefit of homeownership is the leverage. But with a home, the leverage actually works against you both in risk and expected return. It hurts you. A typical mortgage rate is about 6%, the average return on a home, historically, as in Yale's Robert Shiller's, Irrational Exuberance, 2nd Edition, is only 0.4% above inflation, so the leverage not only increases the risk, it lowers the average return too! The expected home price appreciation is about 3.4%, but you're borrowing at 6%. Of course, this can be worth it because of the savings on rent, but you save on rent buying even the cheapest home. Every extra $100,000 you spend after that on a home costs 6% per year and brings in only 3.4% per year in average home price appreciation, and that's not even counting additional maintenance, utility, and insurance costs (taxes are usually about a wash, with the benefit of interest deduction balanced by the cost of property taxes). Still, it may be worth the expense if you enjoy the more expensive home enough, but as Harvard's Elizabeth Warren and I advise, never let your Must-Have (fixed) expenses get above 50% of your after tax income (with rare exception, like if you're a student, even renting a cheap room in a house may push your Must-Haves above 50%, but this is a temporary situation. For more information I strongly suggest Dr. Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan").