Adapting to Climate Change Through Renting (Rather than Owning) a Home
In my 2021 Yale Press book, I offer many ideas that would help us to adapt to climate change. One idea I explore is that more Americans should rent their home rather than owning their home. As I read this “Doomer” piece about Vermont in today’s New York Times, it made me think that I should sketch out my logic again.
Over the years, I have written many papers about home ownership and the tradeoffs that home owners face. The economics is simple. Suppose you buy a $500,000 home with a 30% down payment ($150,000) and a loan of $350,000. The $150,000 has an opportunity cost. You could have invested that money in the stock market or a diversified real estate fund (a REIT). By investing in a house, you have put “all of your eggs in one basket”. Standard risk management teaches us that this could be a mistake, especially in an economy facing greater localized shocks.
A home owner loses some future geographic flexibility. In economics, there is an idea called the “Oswald Hypothesis” that argues that home ownership raises your probability of being unemployed in the future. The intuition for this claim is that home owners are less likely to migrate away from an area in decline and this “chains them” to a sinking ship. Migration is a major self protection strategy that helps people to adapt to local shocks. A footloose renter can more easily move from Vermont (if it indeed is in decline) to move to Las Vegas (if Vegas is booming). A home owner faces greater fixed costs to making such a move. (A subtle aside; home ownership isn’t randomly assigned and this means that those who love an area a most are most likely to buy there so home ownership is correlated with a person specific taste for locking in).
An even more subtle point is that if more of us rent then we rent from a for profit business. Behavioral economists often argue that people who own homes are “amateurs” who do not know what they are doing and that they make mistakes in managing their assets. While this is possible, if more people are renters then they will rent from the owner of the asset. If the asset owner owns many homes then this entity has the scale to lose significant $ if they make mistakes. Have you read my old Walmart paper that Walmart has the right incentives to be energy efficient in part because of its scale of operations.
The same logic applies for adapting to increasing weather extremes. Larger management companies will use its access to capital, Big Data and good management to anticipate emerging risks and it will create better real estate assets that are more resilient than what individual home owners would achieve if they run the asset.
Note my point here, as we face more climate shock volatility —- who has an edge both ex-ante in adapting to the shock and ex-post in bearing the costs of ugly shocks such as Vermont flooding?
Some urban economists have argued that a neighborhood of renters will feature less social capital as people do not have a fiscal incentive to be good neighbors. I am sure that there is some truth to this but in our increasingly volatile economy where places face more severe shocks, we need a new contract design that assigns the risk to those with an edge in offsetting it and diversifying its consequences. Do not hold all of your eggs in one basket!
A final point I make in my 2021 book relates to politics. Note that I haven’t mentioned Government once in this post. When we are home owners, we become place based interest voters. We vote for other people to subsidize the protection of our area. We vote to stop new construction even if we live in a relatively climate safe place.
If instead, voters are renters then we have an incentive to encourage construction because this lowers local rents (shifting out aggregate supply). If we hold the national portfolio as our wealth, then we have a greater incentive to pursue pro-growth policies and this reduces national poverty.
I claim that the costs of climate change for the people of the United States would be much lower if we were all renters. Owners of real estate would compete to attract us to live in their housing. If housing is perceived to be unsafe, then rents decline and the owner of the asset would have an incentive to upgrade the asset or she will receive lower rents (her revenue) from us. Such housing entrepreneurs would demand innovations in housing construction and housing architecture to offset the serious risks we now face.