The Folk Economics of Housing is Folked Up
When confronted with a puzzle, economists instintively look for an explanation based on the incentives of rational people acting within institutional constraints. The economic approach is humble–rather than assuming that something is wrong with other people, the economists begins to unravel a puzzle by assuming that there is something the economist doesn’t understand. The economic approach is respectful of other people’s preferences and the constraints that they operate under. The economic approach is egalitarian, it looks for answer that amounts to, “ah, now that I understand this, if I were in the same position I would do as these people are doing.” The economic approach is powerful but it can be taken too far. Sometimes people aren’t rational. As Larry Summer said, “There are idiots. Look around.”
In Folk Economics and the Persistence of Political Opposition to New Housing Clayton Nall, Chris Elmendorf, and Stan Oklobdzija look around at the housing market and declare there are idiots. Well, they are more polite but that’s the gist. Did we really need a 96 page paper to tell us this? Well, I didn’t. I was convinced of the problem years ago when after giving a rational explanation of why it’s difficult to get new housing approved, Bryan Caplan remarked wrly that “yeah, that’s all true but renters are just as opposed to new housing as homeowners.” What this paper shows is that Bryan was right and that it matters.
Using two nationally representative surveys of urban and suburban residents, with embedded experiments, we show that about 30%-40% of Americans believe, contrary to basic economic theory and robust empirical evidence, that a large, exogenous increase in their region’s housing stock would cause rents and home prices to rise. This finding is robust to variations in the source of the supply shock, the manner in which price predictions are elicited, and the stated assumptions about counterfactual future prices in the absence of the shock. Moreover, by comparing homeowners and renters, by relating price predictions to self-reported confidence in the prediction, by comparing the predicted effects of more- and less-popular supply-shock scenarios, and by exploiting a survey experiment, we are able to discount motivated reasoning or guessing as explanations for these responses.
The authors do have new results which I wouldn’t have predicted. People are idiots about housing especially but not about rutabagas.
Housing “Supply Skepticism” is not just a manifestation of general economic ignorance. We show that the public understands the implications of supply and demand in markets for agricultural commodities, for labor, and even for cars, a durable consumer good that, like housing, trades in new and second-hand markets. There is also overwhelming agreement about how home prices and rents are locally affected by changes in neighborhood quality, by in-migration of rich people, by expansions of employment, by demolition of affordable homes, by new construction of expensive housing next door to more affordable homes, and (perhaps more questionably) by corporate ownership.
A deep problem is that people tend to blame developers of housing for high prices, i.e. they blame high prices on the one group most responsbile for lowering prices! We see the same thing in other markets, of course, but in housing this effect appears especially strong.
…we observe a very strong tendency to blame housing providers (developers) for high housing prices. Conversely, actors whose stock in trade is opposing new development (environmentalists, anti-development activists) are almost never blamed. Incumbent owners who rent out their property (landlords) are commonly blamed, whereas incumbent owners who occupy it (homeowners) are not, even though both groups have a similar economic interest in supply restrictions. The pattern of blame attribution is very similar for homeowners and renters, except that renters hold landlords more responsible and homeowners are slightly more likely to list developers in their top three.