It's Not the Size of the Home, But What Comes With the Neighborhood

Econobloggers aren't liking this claim by Cornell economist, author, and N.Y.T. columnist Robert H. Frank in his new book as interpreted by an N.Y.T. book reviewer:

"When asked whether they'd rather have a 4,000-square-foot house in a neighborhood of 6,000-square-foot McMansions, or a 3,000-square-foot home in a zone of 2,000-square-foot bungalows, most people opt to lord it over their neighbors."

(I'd bet none of the bloggers have actually read the book -- which is pretty short at 125 pages -- but are picking it up from the N.Y.T. review by Daniel Gross.)

The bloggers' biggest argument against Frank is that people's real-world behavior is the best measure of their actual feelings -- not what they say on a survey. This is undoubtedly true.

Alex Tabarrok over at Marginal Revolution even runs a regression on a subset of home sales in Northern Virginia to prove the point:

"The bottom line is that houses with bigger lots sell for more...but the increase in price is less when your lot size is bigger than the average lot size. In other words, people do not want to own the biggest house in the neighborhood."

But the main problem with the counterarguments is that they're taking Frank's statement out of context.

His was a thought experiment trying to illustrate the concept that relative income is as important as absolute income. We humans tend to spend more on "positional goods" -- those that show how well off we are like homes, cars, Rolexes -- than on other kinds of goods like insurance or vacation time that are harder to put on display.

Here are some studies making that point.

Frank further argues that spending on positional goods by those on the top of the income ladder force those in the lower brackets to try and keep up. It's all about context he writes:

"The problem confronting a family is like the one confronting a participant in a military arms race. It can choose how much of its own money to spend, but it cannot choose how much others spend. A middle-income family that buys a smaller-than-average house typically must send its children to below-average schools. Buying a smaller-than-average vehicle means greater risk of dying in an accident. Spending less - on bombs or on personal consumption - frees up money for other pressing uses, but only if everyone else does it."

So, running a regression on what people actually do is a bit silly unless you account for why people buy houses in the areas that they do. Quality of schools and crime rates are likely to be at the top any such list. Does Tabarrok have time to take this on?

And here's a more useful way to phrase Frank's premise: If all else is equal, would you choose to live in a world where you own a 4,000 sqft home in a neighborhood of 6,000 sqft McMansions or would you want to live in a world where you have a 3,000 sqfooter among 2,000 sqft homes?