What is the optimal home ownership rate in the US?

My answer on Quora:

I think this question just gave some economist out there an idea for her next paper, because, to my limited knowledge on this literature, there do not seem to be many studies that try to answer this question. There may be a reason for that and that reason could be methodological or theoretical. I personally do not know, but my sense is that there is a more fundamental question to tackle first.

The underlying questions to answer regarding any optimal home ownership rate for a country would need to be (1) optimal to what end? and (2) why is that important?

Optimal or In Equilibrium?

It is important to first define “optimal”. Is it different or the same as “equilibrium” in this context? A general (full economy) or partial (single market) equilibrium? A housing market equilibrium would depend on interest rates, taxes, residential fixed investment, new home construction, and a variety of other forces that impact the housing market (e.g. schools, jobs, etc.). Such an equilibrium can move up and down over time, and it would likely move very closely with the general equilibrium of the whole economy (given the main drivers of demand and supply in housing, and given the large size of residential real estate in most economies).

So, would an optimal rate be the same as the partial equilibrium rate? Or would it be one that maximizes welfare? Or perhaps maximizes household wealth? This definition seems like it would need to be narrowly defined in such a way that it helps answer something specific (i.e. the “so what?” behind the question, meaning that an “optimal rate” would need be sought after relative to a given objective. That objective can change, and with it an “optimal rate”).

Interpreting the data

The figure below suggests that some percentage in the low 60s has been a stable average in the US, however one cannot conclude that that is an “optimal rate”. The 1970s was a decade of stagflation and the 1980s saw a sharp increase in income inequality. Clearly, the late 1990s and early 2000s bubble is no equilibrium. So, the economy as a whole may not have been operating under “optimal” conditions (price stability, financial market stability, low unemployment, high labor force participation, real wage growth, robust investment and high social mobility) during each of those decades. The average home-ownership rate during times of relative stability could suggest that housing markets were in reasonable partial equilibrium, but was it an optimal rate that maximizes or minimizes [insert objective here]?

In the end, my take is that there is no general optimal home ownership rate. It is a function of government policies and the particular context (“structure” for economists) of a particular economy. There may well be specific optimal home ownership rates. Ones that are specific to a particular objective.


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