Perverse Incentives

Everyone Wants to Be a Homeowner. Why Not a Foodowner?

Imagine if we bought food the way we buy housing.

Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.

Buying that stream of future food would be expensive, so you’d get a loan from a bank to cover most of the cost, secured by your interest in those future chicken breasts. And if for some reason you didn’t need your chicken contract anymore (you became a vegetarian or you moved out of the delivery range of your chicken supplier), you could sell the contract at the current market price.

With this system, perverse things would begin to happen. Normally, consumers prefer that food prices be low. But this practice would create a large constituency of foodowners, who would benefit from rising food prices: If you bought your chicken contract for $20,000, and rising chicken prices pushed its value to $40,000, you’d have a nice windfall.

Foodowners would eagerly support government policies that restrict the production of food because that would push up prices. And they might reap windfalls from rising prices without selling their contracts: They could refinance, cashing out the equity in their appreciated food contracts to spend on caviar and crême brùlée contracts, or on nonfood items.

People might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit. That might lead to a food bubble. And if food prices crashed, a lot of highly leveraged foodowners would end up in bankruptcy.

That would all be pretty stupid. But it would all seem perfectly normal, as it very closely mirrors the way we approach housing. Housing exists so people can use it. But because housing consumers tend to take long-range equity interests in housing, they come to view housing as an investment, which distorts the housing market in the directions of restricted supply, inflated prices and speculation.

And because home equity is often the dominant form of investment for a middle-class family, people bet their economic fortunes on the residential real estate market where they live, rather than making the less volatile bet on the overall condition of the economy that comes from a balanced portfolio of stocks and bonds.

You might object that home prices are not more volatile than the stock market. But the relevant issue here is the equity in a home with a mortgage on it; a 20 percent decline in home prices may wipe out the equity interest entirely, making it a riskier bet than buying stocks.

Betting on your local real estate market isn’t all that different from betting on the price of chicken, which is why I got on my soapbox recently on MSNBC to urge people to rent their homes, and start viewing housing as a consumption good, like food.

I will grant that there are some advantages of homeownership. Owning offers people a sense of security, as well as the freedom to customize their residences as they see fit. Those are perfectly good reasons to buy a home as a consumption good; it is not a justification for homes (or chicken breasts) as investments.