Recommended Reading, Feb. 2023

On the 23rd of this month, the Richmond Fed will host our second 2023 installment of District Dialogues, a series where we tackle — with the help of experts in our district and beyond — important issues facing Fifth District residents. This time, we’ll be conversing on housing, which is huge in our lives and huge in the economy. (Not all things follow that pattern, by the way: For instance, food is huge in our lives but relatively small in the U.S. economy as employer, GDP producer, and so on.)

A paper that really influenced how I think about the “spillovers” that housing creates was written by several of my colleagues some years ago: “Housing Externalities.” (There’s also this lovely summary.) In their work, housing quality looks powerful indeed as a booster of nearby home values for even those who did nothing special to theirs! This, in turn, makes housing policy potentially rather powerful, and it tells me as an economist that market outcomes may leave win-win outcomes on the table. Why? Because each homeowner likely ignores the happy effect of their home improvement on their neighbors. Contrast this with other daily activities: Me making a better PBJ for myself doesn’t make your lunch taste any better, so market solutions likely work fine at helping us realize all win-win possibilities at lunchtime.

Incidentally, this paper is an example of a now-pervasive form of research in economics — the creative location of a “natural experiment” that allows statistical tools to answer questions beyond establishing correlations, and instead to plausibly showing causal effects of economic forces (here, housing policy).

A book from last year on housing that’s been getting sizeable attention is Jenny Schuetz’ Fixer Upper: How to Repair America’s Broken Housing Systems. I’m just sitting down to read it, and will report back as I learn more. If you’ve digested it, let us know how you see it.

From an economist’s perspective, housing is extremely interesting. The spillovers notwithstanding, housing still has a heavy “private” component: If you’re in a house, I can’t use it at the same time (at least not after you call the police). But it’s tied up in extremely complex ways with goods that are not so private — even in addition to the spillovers that the paper above measures. In the U.S., local public school quality, and hence life chances too, are connected to housing. Policy also treats it very differently: We tax it special ways; we create institutions aimed at lowering borrowing costs for it. And we talk it about as a way to build wealth. And we have used housing policy to actively segregate — in Black History Month, this is useful to not forget.?Moreover, housing — and the debts people take on to get into it — is seen as a routine factor in many of the worst financial and economic crises that developed countries, and regions within them, experience.

So many tentacles, so much freighting with broader social goals, so little time!?