Here is a graph of implied net returns to homeownership before taxes and capital appreciation, for Dallas. In Dallas, property tax and capital appreciation over the long term probably roughly cancel each other out. Much of the reason for lower returns on high priced homes is because tax benefits are more universally captured among those homes - our broadly efficient housing markets reflect the highly regressive tax treatment of housing income in the relative prices of different homes.
Median Price and Rent, by zip code
I presume that part of the reason for the high return is that the management costs to landlords in low-end neighborhoods tend to be higher. One of the costs of tenant-occupied real estate is the risk of bad tenants to the landlord. This may be the most valuable benefit of homeownership - the value of control...the value of knowing the tenant and the landlord have incentives that are aligned. And, they really can't be more aligned than if the tenant and landlord are the same person.
There is a discontinuity here. In a negative equity environment, the de facto owner is the bank, and everyone is familiar with stories of the condition homes were sometimes left in by foreclosed families. So, there is certainly a risk to ownership that utilizes low down payments.
There is a presumption that low down payments were the reason for much of the supposedly overpriced housing stock in the 2000s. Adding this presumption to the problem of underwater owners, we conclude that low down payment programs aimed at owner-occupiers are a big problem, and the lesson we take away from the period is that we should get rid of those programs.
The lesson we should learn is that supply constraints lead to volatility and dislocations. In cities without that problem, there was no price bubble, there was no rush of defaults.
Instead, we have decided that the lesson is that low income households shouldn't have access to ownership. The control premium is extremely valuable for households that live in low-income neighborhoods. It puts more families in the position of caring for their homes and for the neighborhoods. It gives them a tremendous return on investment. It puts them in a position where they internalize the gains of their own responsible behavior, and it can make them advocates for local changes that increase the value of location.
The lesson is that access and liquidity are public goods. We should facilitate access and then manage the nominal economy so that real assets have stable nominal values. It's not the fault of banks and low income buyers that home prices collapsed.
For zip codes with home prices below the median, during the two years 2006-2007, prices in Atlanta were stable and in Dallas rose about 3%. In 2008-2009, those home prices fell by 22% in Atlanta and 14% in Dallas. Why? Why were low priced neighborhoods a lagging factor in cities that never really had a price bubble? Because while everyone was complaining about how the Fed was stabilizing credit markets to bail out the banks, the one thing we absolutely couldn't stand for was to let those predators make loans to lower income households - that's what created this mess, right?! So, even though the evidence that any of that ever happened doesn't show up at all in many measures of national homeownership and incomes, we have decided that the lesson we have learned is to created a housing market where those who have access to credit can buy homes and rent them for double digit returns, and the families that live in them get rising rents and none of the benefits of control and access. The lack of control is just deadweight loss. It is a cost and a risk to the landlord, and the benefits remain uncaptured by the potential owner-occupiers.
Public postures about low-income households that begin with the presumption that they are incapable of handling their own agency, and that financial institutions are powerful and predatory, seem empathetic, but really they are rooted in elitism, with all the baggage and targeted harm that comes with it. It seems to me that this elitism has only garnered a populist veneer because it is supported by a foundation of anti-finance prejudice which has become the overwhelming point of view in this country, which led to the invention of a set of accusations that may have little basis in reality. Prejudice is not known for being sensitive to marginal new information, unfortunately. It will be very difficult for widely distributed growth to appear in this country again until the playing field in housing is leveled again - whether in terms of ownership or location.