Rober Shiller, co-creator of the Case-Shiller housing index, is a wonderfully informed observer of U.S. real estate and is always worth paying some attention to. But he really should be horsewhipped for this column in Los Tiempos de Nueva York, arguing (not persusasively) that subsidized real estate is central to the American "national identity," and concluding (with that more-in-sorrow-than-in-anger tone right-thinking economists always use) that it needs to be maintained:
The best answer isn't found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.
Strangely, the event Shiller points to as the foundation of that national identity was actually a clear case of interest-group capture: Depression-era housing and construction support that was designed to minimize damage to the hard-hit building trades. You can argue that it was worth creating the FHA in 1934 or Fannie Mae in 1938 in order to help out contractors and laborers, but this has nothing to do with any claims about the morality of homeownership.
More broadly, Shiller is in that well-accustomed spot for economists who should know better: The dismal science makes one thing clear, but collectivist consensus demands another outcome. So he ends up arguing that we should keep in place the infernal machine of subsidized real estate, but with minor modifications to protect the stupid:
If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.
There's no way around the reality that many Americans are back to renting, and many more will be joining them over the next half-decade, and Shiller rightly makes the case that an increase in the number of renters is not necessarily bad. But his national identity conceit leads him on a detour to far-off Switzerland, which preserves its cuckoo-clock identity despite a very low level of homeownership:
America isn't Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs, often with distinct features. If many of these homes needed to be converted to rental units, home prices might well drop.
Note that conclusion: The danger of converting more land to rental property in the 'burbs is not that there won't be demand for rental stock, or that many of these areas (in my neck of the woods especially) are overbuilt to begin with. The danger is that rental business might allow house prices to drop a little bit.
The conclusion, in which nothing is concluded:
We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.
My response to this (after "What do you mean 'we,' kemo sabe?") is that it is Shiller who assumes our basic institutions are perfect. It's precisely because central planning cannot capture the richness of human experience that the government needs to stop distorting the housing market. Although Shiller understands real estate subsidies are draining, dangerous, and unsustainable, he's politically astute enough to understand there's no way to get rid of them. But with government redoubling its efforts to blow gas into the deflated real estate bag -- through the first-time home buyer tax credit, multi-trillion-dollar life support for the GSEs, debased FHA lending standards, and more -- he could at least have the decency not to applaud this misbehavior.
The irony is that Shiller is right: Americans like to own stuff. Immigrants still come to America just for the opportunity to own stuff. We like to own stuff even when we have to pay for it ourselves. And a majority of us (still!) understand that ownership implies you have, in fact, paid for the item in question. That's an economic truth HAMP applicants can ignore, but Yale economists really shouldn't.
Other (and kinder) thoughts from Calculated Risk.