Keeping up with the Jones’ school contributed to housing bubble

I know people who gamed the system by treating 2/28 ARMs as rental properties. Other people got caught trying to treat houses as stock-type investments. Yet others got burned by predatory loans.

But, Robert H. Frank argues, many people caught in subprrime, or Alt-A, mortgage problems, were trying to buy their way into better school districts:

Hints of how things began to go awry appeared in ‘The Two-Income Trap,” a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.

It’s easy to see why. Even in the 1950s, one of the highest priorities of most parents was to send their children to the best possible schools. Because the labor market has grown more competitive, this goal now looms even larger. It is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: To gain access to the best possible public school, you had to purchase the most expensive house you could afford.

But what works for any individual family does not work for society as a whole. The problem is that a “good” school is a relative concept: It is one that is better than other schools in the same area. When we all bid for houses in better school districts, we merely bid up the prices of those houses.

So, to follow out Frank’s thesis, if we devote even more energy to school reform and improvements, along with fixing loopholes and tightening loan standards, we can address some of these problems.