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Does the United States still overinvest in housing?

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  • Lori L. Taylor
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    Abstract

    Savvy investors allocate their resources across different types of investments to maximize their returns; savvy societies do likewise. Just as with the private sector, society maximizes the return on its investments when risk-adjusted social rates of return equalize across all types of investments. Unfortunately, whereas market arbitrage ensures that risk-adjusted private rates of return equalize, no similar mechanism exists to guarantee that risk-adjusted social rates of return are also equalized. Thus, society may invest relatively too much in some types of capital and relatively too little in others. The relatively low risk-adjusted social rate of return to housing led many researchers to conclude that the United States overinvested in housing before 1986. ; Much has changed in the U.S. housing market since 1986, however. In this article, Lori L. Taylor extends previous analyses to examine the case for overinvestment in housing in the post-1986 period. Her analysis of risk-adjusted social rates of return indicates the U.S. economy could grow faster if society shifted more of its resources away from housing and into high school education and, especially, nonhousing fixed capital. Thus, the evidence suggests that despite substantial reform, the United States continues to overinvest in housing.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1998)
    Issue (Month): Q II ()
    Pages: 10-18

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    Handle: RePEc:fip:fedder:y:1998:i:qii:p:10-18

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    Keywords: Housing ; Housing - Finance ; Real property;

    References

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    1. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    2. De Long, J Bradford & Summers, Lawrence H, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 445-502, May.
    3. Auerbach, Alan J & Hassett, Kevin A & Oliner, Stephen D, 1994. "Reassessing the Social Returns to Equipment Investment," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 789-802, August.
    4. Groot, Wim & Oosterbeek, Hessel, 1992. "Optimal investment in human capital under uncertainty," Economics of Education Review, Elsevier, vol. 11(1), pages 41-49, March.
    5. Harvey S. Rosen, 1983. "Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity," NBER Working Papers 1161, National Bureau of Economic Research, Inc.
    6. Follain James R. & Leavens Donald R. & Velz Orawin T., 1993. "Identifying the Effects of Tax Reform on Multifamily Rental Housing," Journal of Urban Economics, Elsevier, vol. 34(2), pages 275-298, September.
    7. Roger G. Ibbotson & Laurence B. Siegel, 1984. "Real Estate Returns: A Comparison with Other Investments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 219-242.
    8. Richard K. Green & Michelle J. White, 1994. "Measuring the Benefits of Homeowning: Effects on Children," Wisconsin-Madison CULER working papers 94-05, University of Wisconsin Center for Urban Land Economic Research.
    9. Edwin S. Mills, 1987. "Has the United States Overinvested in Housing?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 601-616.
    10. Peter Chinloy, 1991. "Risk and the User Cost of Housing Services," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(4), pages 516-531.
    11. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    12. Alm, James & Follain, James R. & Beeman, Mary Anne, 1985. "Tax expenditures and other programs to stimulate housing: Do we need more?," Journal of Urban Economics, Elsevier, vol. 18(2), pages 180-195, September.
    13. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
    14. Weale, Martin, 1993. "A Critical Evaluation of Rate of Return Analysis," Economic Journal, Royal Economic Society, vol. 103(418), pages 729-37, May.
    15. Taylor, Lori L, 1992. "Student Emigration and the Willingness to Pay for Public Schools: A Test of the Publicness of Public High Schools in the U.S," Public Finance = Finances publiques, , vol. 47(1), pages 131-52.
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    Cited by:
    1. Lawrence J. White, 2002. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Working Papers 02-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. W. Scott Frame & Lawrence J. White, 2004. "Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac," Proceedings 922, Federal Reserve Bank of Chicago.
    3. Wall, Larry D. & Eisenbeis, Robert A. & Frame, W. Scott, 2005. "Resolving large financial intermediaries: Banks versus housing enterprises," Journal of Financial Stability, Elsevier, vol. 1(3), pages 386-425, April.
    4. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
    5. Kim, Kyung-Hwan, 2004. "Housing and the Korean economy," Journal of Housing Economics, Elsevier, vol. 13(4), pages 321-341, December.

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