America’s rich because we have lots of big houses

Why do so many immigrants want to come to America?  Not because we have great infrastructure; I’ve seen better in many foreign countries.  Instead, it’s our high level of consumption.  And what makes our consumption so high?

Think about the basic necessities; food, clothing and shelter.  For several decades, almost all developed countries have met the needs of most citizens for food and clothing.   We can only eat so much, and elegant clothing has gone out of fashion.  Go to a football game and you might be sitting next to a millionaire or a plumber.  There’s no way to tell because either could be wearing blue jeans.  Indeed the plumber may well be a millionaire.

Houses are different.  People really like big houses in nice locations.  And that’s where America really shines.  When immigrants from Mexico or India or China see how much house you can buy in a Houston suburb for $350,000, they are blown away.  And not just a big house, but room to park your cars and boats.  All within the price range of a professional, upper middle-class salary.

This post was triggered by a very interesting Karl Smith post, which showed that about half of our entire capital stock is housing and home improvements:

Now this only includes private capital so roads and other government infrastructure are not in there. However, you can see that its overwhelmingly housing, then shopping.

So when you say, increase the size of the US capital stock to large extent what we mean are bigger and better homes and shopping centers.

And when we say increase the productivity of workers what we mean is that homeowners get more out of being their own landlords and that retail workers are serving customers in nicer facilities.

Matt Yglesias is a bit skeptical:

I’d say it’s a reminder that you need to treat government statistical categories with a grain of salt. The “residential investment” category should probably be thought of as a form of consumption. But that means it’s important to ask, when faced with a tax policy concept that’s allegedly pro-growth due to its investment properties, whether it’s not just really a proposal to shift consumption out of some sectors and into housing.

I can’t imagine how this could be right.  I admit that the line between consumption and investment is blurry.  But the borderline cases are things like cars and home appliances, not houses.  The longer an asset lasts, the more capital-like it is.  And well built houses last for a long time.  Admittedly I may be biased, as I live in a town full of old, well-built houses.  And in cities like Detroit lots of homes are being torn down.  But I don’t think Newton is that exceptional.  I visit Tucson every year, and see the sorts of new homes that are much more typical of 21st century America.  And the Tucson homes that sell for about $200,000 are clearly built to last for 100 years with little maintenance.  These are certainly “capital” by any reasonable definition.  Indeed many factories and other commercial structures become obsolete long before houses do.  The houses I lived in as a kid (in Wisconsin) were already very old.  Yet none have been torn down.  In contrast, sports stadiums built in the 1970s that I recall as new and futuristic, are already obsolete.

I often notice commenters who share Yglesias’s attitude toward houses, and sometimes I wonder if it represents a sort of prejudice.  We’ve all seen people who think that German export of cars or turbines is somehow more virtuous than Greece’s provision of tourism services, or London’s provision of advertising services.  Perhaps the attitude toward housing is somehow related to this deep-seated belief that some products are more worthy than others.  I’m not opposed to Veblen-like cynics arguing that the pleasure derived from a big house is shallow and superficial.  (Easy to do if you aren’t a Chinese or Indian immigrant who grew up 5 people to a room.)   But the same is true for most of the stuff churned out by our factories.  And no one denies that factories are “capital.”

PS.  I favor abolition of the tax deduction for mortgage interest.  And a minimum 20% down payment for any mortgage from a FDIC-insured institution.  And a carbon tax.  I like big houses, but not enough to subsidize them.



33 Responses to “America’s rich because we have lots of big houses”

  1. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2011 at 18:38

    Interesting post.

    I have put houses in the consumption category, perhaps as they often larger than needed.

    Obviously, we need to shelter employees, managers and investors so they are productive, have a good night’s sleep. That could be done with much more modest housing. Above that, does it become conspicuous consumption? I cannot concede the four-story manse is “investment.”

    Also, I think of investment as productive equipment or infrastructure as traditionally understood–something that helps you produce. Factories, bridges, dams, tractors, etc. Even schools.

    Housing? Seems a bit iffy. Perhaps large well-made apartment buildings are investments, but luxe housing is not.

  2. Gravatar of Rajat Rajat
    3. October 2011 at 19:19

    “When immigrants from Mexico or India or China see how much house you can buy in a Houston suburb for $350,000, they are blown away.”

    Not just India and China. In Melbourne, Australia, you would be lucky to buy a one bedroom apartment for $350k. I am in Washington DC for a few months and outside of Georgetown and a couple of other places, I am amazed by how cheap houses in the DC area are. What does a professional earning $200k+ do with their money in this country?

  3. Gravatar of mbk mbk
    3. October 2011 at 19:42

    Yes, there’s something to say in favor of countries with lots of space. I like big houses and yards too, although frankly, relating to immigration, the US doesn’t have all that much immigration compared to its size. Somewhere I read that if Singapore let in all willing immigrants the population would swell from 5 to 12 million in an instant. I doubt the US has the equivalent, umm, 400 million prospective immigrants lined up. And housing in Singapore is extremely expensive. And small. And doesn’t come with a yard, usually.

    So, to say those immigrants want to come for all those big houses in the US mainly…. I don’t know about that.

    I’m also confused about the investment vocabulary. Like Benjamin Cole I see true economic investment as anything that is intended to return a commercial economic profit (i.e. economic value added on top and above the return on “risk free” – haha – securities). So you may call housing an “investment” from the buyer’s perspective if the buyer truly invests in either the hope of speculative capital gains or rental yield.

    When the word “investment” is used outside this field, and that’s most homeowners, then I don’t see it as an investment. I mean, a car dealer once tried to sell me insurance on the car I just bought “to protect my investment”. But clearly this is just an abuse of language. A small aspect and cost of the car returns me a yield – I get to work saving time and this has value – but most aspects and costs related to the car are consumption. Same for housing. If there’s no return, or at least hoped-for return, it’s not an investment.

  4. Gravatar of honeyoak honeyoak
    3. October 2011 at 19:58

    It is not so obvious that large houses can’t serve as investment goods. I am always amazed by the handiness of some of my neighbors (one likes to fix up old cars with his son) that would most likely not occur in the smaller stock that is common in Europe.

  5. Gravatar of MikeDC MikeDC
    3. October 2011 at 19:58

    My guess is that housing is become more capital over time.

    I had an extra room added to my home when it was built tailor made as an office. My wife works out of it two days a week, and I’m just starting a job where I basically telecommute from it. Many of her colleagues and the dozen or so people she manages work out of their homes whole or part time. When I taught I did the vast majority of work from my home.

    Increasingly, I’m not that much of an oddball either. Two doors down, a scientist works out of her home. Across the street the guy does it on Fridays. Two doors down in the other direction a guy works out of his house full time, and around the corner I know another woman who who runs her cleaning business out of her house.

    Aside from the last one, myself and all of these other folks all have professional corporate America style jobs. It works for our companies. It works for us.

    Even if you assume housing is 100% consumption, Its durability represents an astounding societal value. Suppose that $350k house is overpriced and oversized by some factor. Say it’s $100k of “conspicious consumption” fluff over what’s really “necessary”.

    Well, 50-100 years down the road, that’s fluff that will be enjoyed by a succession of families, and will continue to be an enjoyable resource if well maintained. What other consumptive good can give that? None, that’s what. From the perspective of 50 years in a the future, no one will know what, for example, what vacations I went on, or how fun they were. But someone will still be enjoying this home. And they’ll pay me to do it, lowering the true opportunity cost of my housing consumption to well below the cost of those vacations.

  6. Gravatar of Charlie Charlie
    3. October 2011 at 20:16


    If houses are mostly capital, why are property taxes not taxes on capital?

    This is from this post:

    “Charlie, I don’t agree on property taxes, I think they tax housing consumption, which is fine (or land, which is even better.)”

    Are you changing your mind or am I missing some nuance?

  7. Gravatar of OneEyedMan OneEyedMan
    3. October 2011 at 20:44

    Doesn’t thinking of housing as consumption imply keeping the tax deduction for mortgage interest? After all, interest on loans to buy productive capital is tax deductible.

    To really put homes and physical capital on an equal footing, you wouldn’t eliminate the mortgage interest rate deduction, you’d keep it. Instead, you’d tax imputed rents as income. Renting a home to yourself or someone else should have identical tax treatment. Untaxed owner-occupied rent is a much larger tax loophole than the interest tax deduction.

    You can see that in the NIPA tables. Imputed rents are on the order of one trillion dollars. At current rates the mortgage tax deduction is costs less than $100 billion a year ( Assuming the income and housing distributions line up reasonably well, the tax rate on imputed income would have to be under 10% for the mortgage tax deduction to raise less. But the average dollar of income is taxed at above 15% and maybe closer to 29% (revenues as a fraction of GDP), so the imputed rental subsidy is much larger.

  8. Gravatar of Nick Rowe Nick Rowe
    4. October 2011 at 03:51

    Scott: Yep. Imagine a factory filled with very expensive machines that required very little labour to operate, that produced large tents. The tents are very comfortable to live in, but only last one year; then you have to buy a new one from the factory. Everyone would recognise that factory (or its machines) as capital. But a house is just like that factory. And if you own a house it’s like owning shares in that factory, and using the annual dividends to pay for a tent.

    There is one difference: you can export the tents, but you cannot easily export the housing services, because they can’t be transported away from the factory that produces them.

  9. Gravatar of Kevin Donoghue Kevin Donoghue
    4. October 2011 at 04:21

    The proposition that Matt Yglesias is considering is: we can boost long-term growth by encouraging more investment and less consumption. His point is that the proposition looks dubious when the investment consists of mansions, as opposed to (say) factories or schools. He’s right. It’s not about whether the pleasure derived from a nice house is superficial, it’s about whether the textbook equation I=dK leads us astray.

    Put it this way: in the 18th century, the British aristocracy liked to invest in ships which transported sugar, slaves and manufactures in a highly profitable triangular trade. Many European aristocrats liked to build grandiose palaces and gardens. I’m certainly not arguing that the Brits were morally superior. The slaves certainly wouldn’t have thought so. But there’s no doubt as to whose investments did more to promote growth.

  10. Gravatar of Master of None Master of None
    4. October 2011 at 05:01

    Agree with OneEyedMan: “Renting a home to yourself or someone else should have identical tax treatment.”

    But I will take is a step further:

    In a consumption tax regime, rent (and owners’ equivalent rent) should be treated as consumption.

  11. Gravatar of mbk mbk
    4. October 2011 at 05:58

    OneEyedMan, there are various European countries that have variations of the taxation of equivalent rent. And in Singapore, the property tax is levied on the basis of equivalent rent (10% of that “annual value”, whether you rent it out or not). Owner occupied property pays a lower rate but still, it is calculated using the same method.

  12. Gravatar of James James
    4. October 2011 at 05:59

    I always tell my students that capital is “stuff we use to produce other stuff”, and by this definition housing probably doesn’t count. I never though of longevity as a necessary or sufficient definition of capital; there is a reason we have the phrase “durable consumption good”.

  13. Gravatar of Rajat Rajat
    4. October 2011 at 06:51

    Putting the tax issues to one side, I think Scott’s proposition is perfectly reasonable – obvious even. Houses are capital because they produce a stream of rent (or avoided rent). People are willing to pay rent because they value housing services and people place a value on owning a home in part because it means they can avoid paying rent.

    Taking Nick’s point, is it relevant to the definition of houses as capital that houses (or the shelter provided by houses) cannot be exported? Many services cannot be exported. Is money spent to train new hairdressers consumption or investment?

    On Kevin’s point, that British mansions did less for growth than ships used to transport sugar, slaves and manufactures, why would this necessarily be the case? No one ‘needed’ to consume sugar or the other final goods and services brought by ships. But having those goods and services made people better off. The same goes for mansions. To argue there is a difference is to move into a discussion of ethics.

  14. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 07:57

    Housing is consumption. Period.

    Land is an investment, but we STILL have to tax it like consumption.

    It might be that putting up a bunch of big fancy house, mixed use retail, a pretty man made lake, makes the land more valuable, but ultimately a BIG comfy house is a steak dinner and TEENY little house is fast food hamburger.

    MikeDC, the point to telecommuting is not the home office, it is the computer. I have an office I never go to, I work from home just to save the 15 minutes on the road each way, but I can work on a smart phone standing in line at the grocery store.

  15. Gravatar of Floccina Floccina
    4. October 2011 at 08:07

    I always assumed that you consumed the depreciation of homes, cars etc.
    BTW I think that a consumption tax should designed with this in mind so that those who move or buy new cars each year are not penalized.

  16. Gravatar of Floccina Floccina
    4. October 2011 at 08:09

    And another point II have relatives in Honduras and would like to move to the USA for the safety and entertainment. The kids can go out biking less threat of being robed and there is more to do in the USA.

  17. Gravatar of Floccina Floccina
    4. October 2011 at 08:12

    To those above who say housing is consumption:

    How about insulation?
    More efficient air conditioners?
    Even LED light bulbs?
    What do you say about negative mortgages?

    I would put interest on a home the consumption category.

  18. Gravatar of AirmanSpryShark AirmanSpryShark
    4. October 2011 at 08:21

    Point of clarification on your postscript: do the no-money-down VA-guaranteed loans to veterans run afoul of your 20% prescription (i.e., is it a ‘subsidy’ or a contractually-earned benefit)?

    FD: I am not an uninterested party. My handle is an anagram of my real name which, by happy coincidence, incorporates the singular form of the collective noun for my branch of service (hence my pseudonymity).

  19. Gravatar of MP MP
    4. October 2011 at 08:36

    Interesting related article:

  20. Gravatar of Nick Rowe Nick Rowe
    4. October 2011 at 08:41

    Floccina: “I always assumed that you consumed the depreciation of homes, cars etc.”

    No. You consume the flow of services that a house or car provides. If houses or cars never depreciated, your consumption would equal the output of serves, which in turn would equal your in kind-income from that asset. If a house or car depreciates, your consumption exceeds your net income from owning that asset. (Net income = Net GDP = Gross GDP – depreciation.)

    Morgan: buying land may be an investment for an individual, but it is not investment in aggregate, since it doesn’t create more land. Only the Dutch (or people who improve the productivity of existing land) invest in land.

  21. Gravatar of OneEyedMan OneEyedMan
    4. October 2011 at 09:06

    Rowe is correct about the land. That’s the difference between the volume of trade on a stock exchange and the value of new shares in IPOs and SPOs.

  22. Gravatar of MikeDC MikeDC
    4. October 2011 at 09:16


    Sure, the computer is a key feature of a home office, but it’s not the totality of it. Take your example to its conclusion. Yes, you can work from a smart phone in a grocery store line, but you won’t be as productive as if you were in your office with a full blown computer. I’m pretty technically inclined, and doing more than quick emails on phones and tablets is terrible.

    The right tool for the job, and an office in a house is a similar productive tool. Sure, not everyone needs a home office, you can occasionally get stuff done sitting at your kitchen table. Just like you can occasionally get stuff done on your smart phone in line at the grocery store.

  23. Gravatar of Kevin Donoghue Kevin Donoghue
    4. October 2011 at 09:28

    Rajat: “On Kevin’s point, that British mansions did less for growth than ships used to transport sugar, slaves and manufactures, why would this necessarily be the case?”

    It wouldn’t be the case if the voyages were unprofitable. But since they were in fact highly profitable and the profits were used to finance the construction of more ships (and many other capital goods besides), that kind of investment undoubtedly did a great deal to foster growth.

    Yes, Blenheim Palace can be regarded as capital, yielding a flow of services: generations of dukes and duchesses could enjoy the satisfaction of living there. But the ships in Bristol and Liverpool were far more productive capital. That’s the point Yglesias is making, it’s not about whether the duke’s consumption is any more meritorious than that of a sugar-buyer. It’s not a question of ethics, it’s a question of what causes GNP to rise faster, which may or may not not be a good thing.

  24. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 10:49


    Land is kind of like gold in that sense, more so it is limited like bitcoin. Generally, more humans = higher value of land (mineral rights) in the future.

    But again, what I said was while an individual can treat land as an investment, we have to treat it like consumption for tax purposes.

    Look, Texas is where is gets done right. You pay tax on property as consumption, in that it is assessed yearly, which prices the poor out gentrified neighborhoods, and keeps you from getting CA style squatters in high rent districts.

  25. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 10:56

    MikeDC, I do a bit of work with a mobile chip maker, we’re coming up quick on quadcore 1.5Ghz processors.

    Expect to see keyboards and monitors at Starbucks / McDonalds connect to them wirelessly.

    Expect your car to easily have the same.

    Generally though I take your point, but I’ve done home offices in 700 sqft and 4000 sqft and don’t draw distinctions enough to view residential / commercial as different.

  26. Gravatar of Becky Hargrove Becky Hargrove
    4. October 2011 at 12:15

    Think of how you wish government would focus less on propping up housing, and more on growing the economy. Given that housing represents such a large proportion of consumption already, perhaps the big stall on growth assistance from Washington is in fact due to the fact that homes need to be paid down before alternative growth projects come along…just sayin.

    But on a slightly different tack, smaller housing, less commitment in paycheck to living expenses equates to more purchases in the world of retail. And more reasons to gain confidence in growing the economy once again. Big houses are great. But so is a housing market that reflects the multi-tiered approach of retail itself, in which production efficiencies allow all to buy, even those with a teeny amount of money.

  27. Gravatar of Nick Rowe Nick Rowe
    4. October 2011 at 12:29

    Rajat: “Taking Nick’s point, is it relevant to the definition of houses as capital that houses (or the shelter provided by houses) cannot be exported? Many services cannot be exported. Is money spent to train new hairdressers consumption or investment?”

    You are right. It’s not really relevant to whether it’s capital. It’s more of a side comment. But for some purposes it might be useful to distinguish between investment that produces a good that you must consume yourself/yourselves, and investment that produces a good that you can, if you choose, sell to others/other countries. For example, if you want to save in future, to pay down debt.

  28. Gravatar of ssumner ssumner
    4. October 2011 at 13:50

    Ben, Houses produce housing services, just like hair salons produce hair cutting services. It may not seem like capital, but it is.

    Rajat, They should be saving half of it, but they don’t.

    mbk, Singapore has many other qualities the US lacks, like low taxes and efficient government. Investment has nothing to do with commercial enterprises. Freeways are investments, even if no tolls are charged. Houses are capital, there’s really no debate about it.

    MikeDC, Housing services are consumption, but the house is a capital good.

    Charlie, One could view property taxes as a tax on housing services, which is a consumption tax.

    OneEyedMan, You are right. What’s not acceptable is giving the mortgage deduction and then not taxing housing profits.

    Nick, That’s a good analogy.

    Kevin, I don’t agree about growth. Growth doesn’t come from houses or factories, it comes from ideas. If there is an externality argument, it’s not to favor factories, it’s to favor idea formation.

    Master of None, I agree.

    James, You said;

    “I always tell my students that capital is “stuff we use to produce other stuff”, and by this definition housing probably doesn’t count.”

    Of course it counts, it produces housing services–shelter. Just like a hair salon produces haircuts.

    Mbk, As usual, Singapore does it right.

    Rajat, Good point.

    Morgan, That’s backward, land isn’t an investment, it’s a natural resource.

    Floccina, I agree about crime. Some of those items you mentioned are investment.

    I don’t think depreciation is consumption. And interest is a financial concept, not a real good. Consumption and investment are real goods.

    Airman, If we need to pay servicemen more, I’d prefer we do that straight up via higher incomes, rather than indirectly with hidden subsidies to home mortgages. But if it’s in your contract, I’m not saying you persoanlly don’t deserve it.

    Thanks MP.

    Kevin, At some point the British cut back on building big manor houses, and put more money into commercial investments. That’s presumably when they noticed those emerging forms of capitalism were offering higher real returns than big mansions. So I still don’t see a market failure there, although I don’t doubt England had lots of market failures in specific areas.

    Becky, I don’t agree, those alternative paths of development need demand, and that means faster NGDP growth. If you have the demanders, new supply of new products will pop up all over. With no demand, it’s hard for new firms to get going.

  29. Gravatar of mbk mbk
    4. October 2011 at 16:32

    “Investment has nothing to do with commercial enterprises. Freeways are investments, even if no tolls are charged. Houses are capital, there’s really no debate about it.”
    Freeways are intended to produce a return of course, either explicit as tax revenue or implicit as a growth return in the economy. The hoped-for tax rent extracted by the state has been used to justify eminent domain cases in the US (a mall pays more tax than poor neighborhood housing). They key – to me – is that freeways and the like are by and large not the final product delivered to the end customer. Their services add value and value will be added downstream still, say by the trucking company.

    In a house for owner-occupancy, the house represents housing services delivered to the end customer. There is accounting logic in distinguishing between the house as capital and the housing service as the product, but really, you can make that distinction with everything else too. You buy skis but what you really consume is ski services. So your private skis aren’t consumption – they’re capital investment. etc. Fair enough, again, there is accounting logic to it. In a ski rental business balance sheet the skis will be on the asset side of course, just like the rental hut. But: It’s not consistent to treat end-consumer-owned skis, TVs, pencils, as consumption but end-consumer-owned housing as capital, just because it happens to depreciate slower.

    On the taxation of housing consumption: “As usual, Singapore does it right.” In Europe often the landlord pays VAT on actual rents received, which is arguably better since since then he can balance that with VAT paid on goods used for maintaining the house.

    Trouble with taxing “equivalent” owner occupied “rent” is that when rental “values” double or treble in 5 years as just happened in SG, you now pay 3x the tax for exactly the same house. Once again this has some commercial accounting logic to it but makes no sense on a human common sense basis in that short time period – as a homeowner you’re likely not amused.

    The beauty of a VAT is precisely that it automatically taxes only the end consumer, and only once. Only VATs make the distinction between intermediate production and end consumption automatically. The barber shop balances the VATs paid on its scissors with the VATs paid on its revenues. Only the non commercial end user of a pair scissors pays the full VAT, precisely since he doesn’t use the scissors as capital investment. I presume you like VATs – they really are sophisticated consumption taxes. (and of course here Singapore gets it right as well since it has a VAT).

  30. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 18:02

    mbk, Yes, I like VAT, although I oppose it in the US unless combined with elimination of income taxes.

    It’s a fine line between consumer goods and capital goods, I agree. It depends on how long lasting a good it. But houses are very long lasting, and hence are arguably more capital-like that factories.

    Roads produce transport services, houses produce housing services, I don’t see a difference. Neither produces “growth.” Technological innovation does that.

  31. Gravatar of Becky Hargrove Becky Hargrove
    6. October 2011 at 06:10

    You said, “Those alternative paths of development need demand.” Think, for a moment, of some of the members of your own extended family over the years, and how what would have been their demand became subsumed by the “for your own good” (understandable)reactions of family. For instance, the older aunt who had lost her husband and wanted desperately to just have her own little house, along with some long overdue autonomy. Now, everyone seemed to agree of course this was not possible (Say’s Law doesn’t always get the chance)and her own demands were overrrun by relatives who insisted she get a little space in their house. Likewise for the aunt with moderate Alzeimers who has lived alone for decades and – especially as she has to fight the demons in her head now, does not understand why she has to live with family. Clearly, life is too complicated nowadays to give these family members the autonomy they crave…or does it necessarily have to be? Not to mention today’s youth with jobs that only pay for a space smaller than the option of today’s apartments.

    Now, the NGDP scenario. Most people agree that the government does not plan the production that such targets would meet, but the producers and consumers themselves. Would the government – in your mind, have a role in encouraging alternative paths of development such as this?

  32. Gravatar of ssumner ssumner
    6. October 2011 at 15:57

    Becky, I’m not sure I understand your question.

  33. Gravatar of Kassandra Mulkey Kassandra Mulkey
    9. April 2013 at 10:50

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