Journal Article

Does the United States still overinvest in housing?

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.

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Economic and Financial Policy Review

Publication Date: 1998

Issue: Q II

Pages: 10-18