Bad Bets

In 2005 and 2006, my wife and I used to go pretty regularly to her old church in Southeast Queens, a well-known (essentially) all-black congregation with a former congressman as minister. Almost every week, all the way through 2006, he would tell the attendees that they should be saving “10 percent for God’s house, 10 percent for your house: stop investing in depreciating assets and start investing in appreciating assets.” In most times, this is pretty good advice.

Within a couple of years, Southeast Queens had one of the highest rates of foreclosure in the Northeast, which remains very high even now:

In 2006, we were living in Central Brooklyn, in our second poorly heated, mouse-infested apartment (the absentee landlord left just enough food in her unused kitchen that there couldn’t be enough glue traps and boxes of poison in the world to stop the squeaking tide from coming upstairs.) We’d fantasize about buying our own place, and when we went to visit realtors, they didn’t hesitate to show us places listed at $500,000, $600,000, $700,000, even knowing we were both public school teachers. And these places weren’t any great shakes, either: a brownstone on Eastern Parkway with six different families living in tiny spaces separated by rotting drywall (“buyer takes responsibility for evictions,”) was $750,000; a two bedroom on a noisy corner of Nostrand, with obvious drug deals outside, in which none of the cabinets or doors closed correctly and there was a strange slope to the kitchen floor, was $600,000.

“This is insane. It’s all going to come crashing down,” I told my wife. And we moved to the burbs.

And I was right, except I wasn’t. It came crashing down in most places, of course. But Brooklyn is one of the only places in the country where those insane prices in 2005 are, by-and-large, fully justified by prices in 2016.

It’s pretty much inevitable that real estate in a place like New York City is as much about highly leveraged investments as it is about home, sweet, home. Luckily, New York has a reasonably-functional rental market. But decades of public policy have made housing in almost every corner of the rest of the country equally oversubsidized and overleveraged.

For any of us- but most of all individuals and groups with low adult literacy and numeracy– negotiating the housing market is a minefield of bad bets. Perhaps nowhere else in our society is the tension between formal equality before the law and the broad distribution of behavioral traits more obvious than in how neighborhood characteristics, skill biased technological change and highly leveraged subsidized home-ownership combine to produce drastic divergences in individual and household wealth.
 More generally, in education as well as in housing, the government can enable us, through subsidies, to take whatever bets we want, or it can protect us from the likely bad ones, but it cannot do both.

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