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Does the United States still overinvest in housing?

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  • Lori L. Taylor

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.

Suggested Citation

  • Lori L. Taylor, 1998. "Does the United States still overinvest in housing?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 10-18.
  • Handle: RePEc:fip:fedder:y:1998:i:qii:p:10-18
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1998/er9802b.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lawrence J. White & W. Scott Frame, 2004. "Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac," Working Papers 04-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Kim, Kyung-Hwan, 2004. "Housing and the Korean economy," Journal of Housing Economics, Elsevier, vol. 13(4), pages 321-341, December.
    3. Tabner, Isaac T., 2016. "Buying versus renting – Determinants of the net present value of home ownership for individual households," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 233-246.
    4. Bruce, Donald & Holtz-Eakin, Douglas, 1999. "Fundamental Tax Reform and Residential Housing," Journal of Housing Economics, Elsevier, vol. 8(4), pages 249-271, December.
    5. 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.
    6. 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.
    7. Lawrence White, 2003. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(1), pages 43-58, February.

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    Keywords

    Housing ; Housing - Finance ; Real property;

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