I recently participated in a survey in which I was asked if I thought the housing market would “improve” over the next year. I assume that they meant to ask whether I thought home prices would increase, but it does prompt the question, why are higher home prices an improvement? After all, if you thought gasoline prices would go up next year, and a survey asked you whether gas prices would “improve”, you would probably say “No”. And it would be plain bizarre to phrase the questions in terms of whether you thought the gas “market” would “improve”.

But the question surely captures the way most homeowners and many homebuyers think about housing, that higher prices are regarded as an improvement. Housing is unusual among consumer goods in its dual role as consumption good and investment vehicle. The classical political economists would have put it in terms of the large gap between its use value, what Adam Smith referred to as the utility of a commodity, and its exchange value, or what it would sell for. (Smith regarded the exchange value as equivalent to a commodity’s “natural” price, although he also believed that under some conditions a commodity could sell for something other than its natural price.) Smith gave examples of goods with high use value but no exchange value, like water, or the converse, like diamonds.

Modern (neoclassical) economists don’t really use this terminology. In modern economics, utility is based on preference satisfaction, and preferences are revealed by market behavior. So if a person spends $1000 on a diamond or $1000 on a mountain bike, they must value these things equivalently, and are presumed to have reached the same utility level. Purchasing an investment product is a form of saving, and saving is deferred consumption. So while, in classical terms, a stock certificate has no use value, in modern terms purchasing a stock certificate is saving for future consumption.

How does this relate to housing? In recent papers, Dusansky & Koç (2007 [gated], 2010 [gated]) show that the investment component of housing can dominate the consumption component, leading to the unusual situation (compared to other consumer goods) in which consumers demand more housing as the price increases (i.e., have an upward-sloping demand curve). Thus, the housing market behaves similarly to the stock market, and a housing bubble forms when people start basing their purchasing decision on the expected future appreciation of the asset rather than its use value in comparison to a similar rental property.

In the recent downturn, the federal government has offered tax credits for home buyers, first for first-time home buyers through April 2010, then extended to September 2010 and expanded to current homeowners changing homes. The overall effect seems small, but the thing I want to emphasize is that, although framed in terms of helping home buyers, the policy was widely discussed as propping up the housing market, which I can only interpret as meaning that it was actually intended to help sellers! That is, this particular policy’s effect, and very likely its intention, was to make homeownership more expensive. This is completely insane, especially considering that under other programs the government tries to promote housing affordability. The only thing I can say is that I’m glad it had little effect.

Between similarly situated buyers and sellers, the effect of the tax credit would not favor one over the other (although, as Ed Glaeser has point out, it could encourage houseswapping—this would benefit both parties, but that money of course has to be pulled from somewhere else in the economy). But between differently situated buyers and sellers, a program which increases housing prices will tend to favor the sellers: owners over renters, real estate developers over home buyers, retirees (who might be moving to smaller houses or cheaper housing markets) over young families (who might be first-time buyers or current owners moving to accommodate a growing family). None of this, to my mind, is a useful purpose for tax dollars.

There might be a place for government policy to help homeowners who want to move, but can’t because their mortgages are underwater—particularly those who live in metropolitan areas suffering from a (not unrelated) double whammy of a “weak” housing market and job losses. The most direct way to help homeowners would be to require lenders to write down mortgage principal. Barring this, the government could aid homeowners who want to move by lending the funds to cover the shortfall, with the loan to be repaid out of the capital gains on the mover’s new home. This proposal is premised on the idea that homeowners, who usually stay put for a long period of time, need help overcoming immediate, temporary impediments to making otherwise economically sensible long-term moves, like moving to a better job market, which would also benefit the economy.

While this idea is more a musing than a fully fleshed out program, if I were advocating for it, it would be important to present it for what it is, which is a program which benefits homeowners (not home buyers), as well as mortgage lenders, but with some justification in terms of correcting a decline in household mobility by unfreezing the housing market. In this respect, it is similar to the Home Owners’ Loan Corporation, which was created during the Great Depression to unfreeze the mortgage market, and would be expected to recoup its investment after the long run recovery of the housing market. Above all, it is an attempt to craft a way to aid homeowners without also raising the purchase price of homes. Although middle-class Americans saving for retirement have come to believe that higher housing prices represent an “improvement”, as housing consumers, in the wake of this downturn, we should be looking for a new paradigm.