Some second-order effects of unaffordable housing

This is one of the best, most interesting, and most important papers I have seen of late:

Housing affordability has declined sharply in recent decades, leading many younger generations to give up on homeownership. Using a calibrated life-cycle model matched to U.S. data, we project that the cohort born in the 1990s will reach retirement with a homeownership rate roughly 9.6 percentage points lower than that of their parents’ generation. The model also shows that as households’ perceived probability of attaining homeownership falls, they systematically shift their behavior: they consume more relative to their wealth, reduce work effort, and take on riskier investments. We show empirically that renters with relatively low wealth exhibit the same patterns. These responses compound over the life cycle, producing substantially greater wealth dispersion between those who retain hope of homeownership and those who give up. We propose a targeted subsidy that lifts the largest number of young renters above the “giving-up threshold.” This policy yields welfare gains that are 3.2 times those of a uniform transfer and 10.3 times those of a transfer targeted to the bottom 10% of the wealth distribution, while also increasing homeownership rate, raising work effort, and reducing reliance on the social safety net.

That is from Seung Hyeong Lee of Northwestern and Younggeun Yoo of University of Chicago.  Via the excellent Kevin Lewis.