"Renting is individually rational but socially harmful." Explain.

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Well, to say that one needs to do something not beneficial for them to help the economy is not something that a free market system is based on. The recession that has now plagued America and the rest of the World was primarily due to the burst of the "housing bubble." People bought houses in the past not as a means to ensure economic welfare but merely because prices were going up so fast that everyone was eager to get a piece of the cake, for which they were willing to pay exorbitant rates and banks were willing to take on extra risks that were in a way compensated by the extra payments they received.

When the housing bubble finally burst, people saw how irrational they had been and that just by pushing the price of a commodity way above what was reasonable and that could be justified by the laws of "actual" demand and supply no one was going to gain.

Renting does not harm the society economically. On the other hand it is a more efficient use of resources. Just like no manufacturing plant can be expected to buy a new machine just to prepare one batch of goods and waste resources, people should not buy more than one houses, live in one and let the other lie vacant. By renting out the house that it not being used resources are being utilized in a more efficient way. And it is ultimately efficiency that leads to the welfare of society, not other short term measures.

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What a great request. I think there are several ways in which to explain this. In the past, the common opinion was that it was better to buy than to rent. Renting was seen to be throwing your money out the window, whereas buying was a sound investment, because there was a strong conviction that prices would go up. This opinion has now been overturned.

First, there has been a huge decline in prices in housing. So, many Americans now owe more money than their homes are worth. Some places have seen a 50% fall in prices. So, based on this point, renting is wiser for the individual. Why buy something that might not appreciate?

Second, I suppose the idea of renting is harmful for society, because so much of our economy is tied to the housing market. If we do not get housing prices up, then we will not get out of this recession. And the only way to get our housing prices up is to sell more houses.

The point is that people need to buy more homes to help the economy.

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