Timothy Taylor on Home Ownership Trends

He writes,

Notice that homeownship rates tend to be much lower in large cities: indeed, if a homeownership rate below 50% seems implausible to you, you might reflect on the fact that this is already a reality in US cities. Notice also that homeownership rates in the Northeast and West regions are already below 60% (of course, this is in substantial part because there are more large cities in these regions). Thus, one’s belief about the future of homeownership is in some ways a statement about where people choose to live in the future.

In my view, the main drawback to renting (government distortions aside) is that you have to negotiate with the owner concerning maintenance and renovations. Perhaps somebody should work on contracts that address this.

As of now, one party (typically the landlord) must bear all of the costs, but maintenance and renovation is only done at the landlord’s discretion. One can imagine a different arrangement that allows the tenant to have discretion, but with incentive to protect the landlord’s interest.

For example, the cost of basic maintenance, such as fixing the HVAC system when there is a problem, could be split 80-20 between the landlord and the tenant. Because the tenant has skin in the game, the tenant gets to be in charge of getting the system fixed.

On the other hand, the cost of renovation, such as a kitchen remodeling, might be split closer to 50-50. Again, the tenant is in charge. The tenant pays a higher share than in the case of basic maintenance, because the renovation might prove less valuable to a subsequent tenant.

Another contractual possibility would be to address the state of the dwelling when the tenant leaves. In principle, the landlord could be compensated by the tenant for damage (that is what security deposits do, up to a point), and the tenant could be compensated by the landlord for increases in property value due to upgrades paid for by the tenant.

14 thoughts on “Timothy Taylor on Home Ownership Trends

  1. Industrial rental – office buildings, for instance – tend to be very different; as are the approach to renovations, furnishings, and outfitting, on a square foot basis. Standardization of office furnishings, for example, and the configurations of space, create an industry.

    In private homes, there are many ‘specialization’ reasons why pricing and valuing renovations and furnishings is very difficult. People value the details extremely differently, costs are highly variable, quality of workmanship is difficult to standardize and monitor. Long term residence is the real variable that enables customization, and length of residence is correlated with ownership primarily because of transactional frictions.

    So perhaps to encourage better upkeep and home customization, the answer would simply be long term leases with clauses providing right to customize – but right now, because of taxes, we call those mortgages. Conversely, in some other countries, they call ownership ‘rent’ because of property ownership restrictions.

  2. Renting is low status in almost all of America, except a few places of extreme density, and thus the type of people who rent are not the same class of people who don’t rent. For some people a 20% or 50% skin in the game is too much.

    In a hypothetical world where there are no status implications to distort this, you’d likely see contracts like the one you talk about.

  3. The main drawback to renting is that in old age with fixed income, your housing costs remain at market rates. Home ownership pays off for the elderly who defer maintenance and upgrades while only needing to meet property tax, insurance and necessary maintenance costs yearly instead of the full market rate.

    With more renters, old age income needs increase causing pressure to increase social security payments.

  4. the main drawback to renting

    I think for a society stand point the main problem of increased renting is it tends enforce less society roots and probably changes the family formation or increase a lot. For upper end renting you points of sharing cost of renovations makes sense but my guess most renters would hate these points because the renters are expecting to long term benefit. The nature of renting would make me want to invest less in the facility. Long term, renters will account for these charges from the landlord and they won’t care about the facility.

  5. Generally people rent because they can’t afford to buy and this is because rents are lower because more of the return is in capital gains. So renting makes sense only in the short term; rising rents make it a bad option in the long term though this can be mitigated by retirement to less dense areas.

  6. To my mind, the primary drawback to renting is the divergence in value-timescale between owner and user. Owner wants net value (income stream + eventual sales price), resident wants pleasantness of immediate experience. There’s no way to contractually align these goals without extending the relationship between the parties well beyond the boundaries (in time or in risk-sharing) of a standard lease.

    Making ownership (including fractional ownership) simpler and transfers FAR cheaper seems like a huge opportunity for someone.

  7. Looking at this from a commercial lawyer’s viewpoint — but not a real state lawyer’s viewpoint — I note that:
    1. The typical apartment rental is for a one-year term, with the ability for either party to terminate at the end of the term, which helps align the landlord’s incentives to whatever is required to keep the tenant (which presumably takes the cost to move into account).
    2. Reputations of apartments are becoming pretty significant, especially with the rise of sites that allow or promote the exchange of reputational information and the ease of online research. Again, that keeps the landlord’s incentives aligned to what the tenant wants.
    3. Negotiating over and, if disputes, arbitrating the value of improvements on termination in a residential context would probably incur transaction costs that are out of line with the disputed value.
    4. Where one party is in control of incurring a cost that another party pays, the payer has all kinds of reasons to control the incurring party’s discretion. See, e.g., health care. Suppose, for example, that your HVAC vendor offers a rebate to the tenant that it does not disclose to the landlord. Monitoring the agency relationship has transaction costs that are significant and, again, might outweigh the value of the improvements.

    All of these are easier — and are in fact negotiated — in larger commercial tenancies, where the dollar figures are larger, so transaction costs are spread over a larger value at stake.

  8. I am surprised to see the shift from condo to apartment in suburban environments in the past 10 years. For example, in Reston Virginia the top end of the rental market is $6-8k/month in new buildings like Harrison and BLVD. The condos built about about 10 years ago are $800k-1.2M.

  9. If I were a landlord I would love the 80%-20% division of maintenance cost you propose. So after the tenant pays 80% of repairing the HVAC I could terminate the lease so I could raise the rent because the apartment has a new HVAC unit.

  10. You forgot the other main problem with renting, which I have personally experienced more than once: having the landlord refuse to renew the lease because they plan to sell the unit/house to someone, forcing you to incur search and relocation costs at an inconvenient time.

    Unless the government interferes (a cure worse than the disease; and something I do NOT advocate), there is no easy solution to the problem that a renter may want to stay when the landlord wants him to go or vice-versa. Longer leases are no answer until they amount virtually to ownership.

    • After having this happen to you several times, have you ever considered asking a landlord for a mutli-year lease or one with with and option of the right for first refusal if they should look to sell the property?

      • You can ask for all sorts of things, but you can’t expect to get them. I tried the multi-year lease gambit but was of course rebuffed– “that is not something our firm does.” As for options to buy, what’s the point? Such an option is too costly unless you do want to buy, in which case it is basically pointless. No rational landlord will sell you such an option for less than it is worth.

  11. Home-ownership+occupation unifies the interests of landlord (capital provider and residual claimant, with considerable power to evict) and tenant (capital user and surplus-generator, with considerable power to waste). This reduces uncertainty for both sides (who are one in the case of owner-occupants) which reduces transaction costs, insurance costs, etc. This is a big reason why owner-occupants generally enjoy more surplus from their living arrangements.

    Owner-occupants do immobilize a lot of capital, and that imposes opportunity costs, but since volatility in living arrangements is exceptionally painful, many people accept the tradeoff and rationally so.

  12. The home ownership going down in cities is part of the income inequality / overpriced city homes problem. New construction is zoned out, for one dubious reason or another, and a “nice” neighborhood (like Palo Alto in 1979, $150k could buy a house) starts to increase in price, but few new houses are built or allowed to be built. And if the economy is growing, like Silicon Valley grew, the house goes up in value. By 5-10% year means up by 8-10 times today.
    One of the worst cases.

    I think Houston has remained more affordable. Folk want room in the house, and around the house, and good neighborhoods, and good local schools. But they NEED to be able to afford to move in. Now, in most growing city places, non-homeowners can not afford to buy, even when they’d be willing to spend more than a third, even up to half their income on housing.

    A) vouchers in schooling would help schools, help get more (not all) kids better educated, and reduce house value increase << this house value impact is the secret reason locals remain against it. Those who are already "in" a "good area" have paid the premium, and don't want to lose it.

    B) replace mortgage interest deduction with some house payment credit (30%?) up to a lifetime maximum per person. And up to a maximum lifetime on a house.

    C) reduced zoning restrictions for good areas w/o recent construction.

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