Second moment citizenship: Homeownership as American nightmare

Public policy in the United States is filled with subsidies, explicit and implicit, favoring homeownership at all socioeconomic levels. From the FHA, Fannie, and Freddie to the mortgage interest deduction, America does all it can to favor homeownership. The United States encourages its citizens to borrow deep and borrow long. Many Americans buy homes with 10, 5, even 0 percent down. Almost no other country allows, let alone promotes, 30-year mortgages.

These policies' economic distortions are legion. A shockingly high number of Americans reach retirement  with no savings besides home equity. American labor markets are unduly ossified because homeownership anchors workers to specific geographic markets. Deep borrowing to finance home purchases—or, worse, to enhance consumer spending—exposes individual banks and the banking system at large to terrifying systemic risk. Treating housing as an investment rather than a consumption good creates a vile political economy rooted in speculation. By shoving populations into suburbs and lengthening commutes, the American love affair with homeownership even aggravates climate change.

This paper's objective is to lay the groundwork for critical evaluation and meaningful reform of homeownership policies. Its methodology consists of developing an appropriate descriptive and evaluative framework from mathematical finance. In his second critique of modern portfolio theory, Richard Roll argued that the capital asset pricing model failed to acount for illiquid assets that cannot be traded on a mark-to-market basis on a publicly regulated exchange. This critique, leveled in 1977, anticipated a public policy concern that has become salient since 2007: Publicly traded securities, to say nothing of private equity, are the domain of the wealthy. The vast American public has its wealth locked up in residential real estate. SEC Regulation D, defining "accredited investors," recognizes as much. The profusion of financial data on all asset classes, from stocks to real estate, enables us to address Roll's second critique. Using widely available data such as the cross-section of stock market returns and the Case-Shiller index of home prices, I will conduct mean-variance analysis of America's collective balance sheet. I will compute the expected return, volatility, and average leverage of household wealth by income and wealth quantile.

Expected results: I hope to show the appalling extent to which homeownership policies have condemned middle- and lower-class Americans to nondiversified portfolios with lower returns, higher volatility, and grotesque leverage. In the language of mathematical finance, the American dream of homeownership condemnts the public to second moment citizenship.