A mother and child sit on a roof in a city
You live where you live for a reason. Ted S. Warren/AP

Calling all rent rationalizers: A new paper shows how your pricey neighborhood is a financial asset like any other.

Another month, another paycheck tossed into the bottomless craw of some shadowy rental management company. That’s what paying to live in expensive cities can feel like when you don’t own property.

Take heart, tenants: You are “saving” for the future by paying up in the present. That’s the optimistic rationalization—er, explanation—at the heart of a new working paper published this week by the National Bureau of Economic Research. It offers a somewhat counterintuitive framework for understanding housing choices and the financial trade-offs tied to them.

The paper, authored by Esteban Rossi-Hansberg and Adrien Bilal, a Princeton University economics professor and Ph.D student respectively, explains that as with any form of investment, the place you choose to settle or stay has a cost associated with it—i.e., how much you’re paying in rent. And every location pays back on that investment in job opportunities, education for your children, cultural amenities, and so forth. Whether it’s Wichita, Palo Alto, Durham, or the heart of Manhattan, your location should be considered an asset with which you can make different investment decisions.

So, when you choose to move to a pricier and amenity-laden city, you’re transferring resources into the future—i.e., saving!—by establishing yourself near opportunities for higher pay and human capital, Rossi-Hansberg and Bilal argue. On the flipside, when you relocate to a community with a lower cost of living but fewer economic advantages, you’re pulling resources into the present that you might have gained in the future—i.e., borrowing.

Given that writing high monthly rent checks feels like setting your savings account on fire, it’s a nifty bit of psychological judo to think of them instead as a form of savings in themselves. Unfortunately, just as the uneven economic landscape means that not everyone can afford to keep their savings account afloat, let alone invest in financial markets, most of us can’t easily upgrade our neighborhood as a form of future savings.

But, Rossi-Hansberg and Bilal hypothesize, if your location is an asset, it can also be “sold” when you need the income. In other words, if you’ve just lost your job or been hit with a big bill, you can cash in your location by moving to a less-premium one. The researchers tested this theory against a large dataset of employer tax returns in France, which represented about 4 percent of workers there from 1994 to 2007. They found strong evidence that, compared to wealthier counterparts, individuals at the bottom of income curve were more likely to “trade in” locations, whether they rented or owned, as a result of a negative change in their job status or prospects.

This is not a surprising conclusion: If you can no longer afford your rent, you’re going to move somewhere cheaper. But the location-as-asset theory may complicate what the researchers see as the prevailing explanation for why people choose to stay in areas with fewer opportunities. “The traditional view out there is that people are trapped in certain bad neighborhoods, due to high mobility costs,” Rossi-Hansberg said. This study, on the other hand, gives more agency to the individual making a location choice. “In many cases, people want to live where they live, so that they can transfer resources to present.”

This study has caveats aplenty: The dataset the researchers used doesn’t get into the specific circumstances that pushed individuals from one neighborhood to another; clearly, changes in someone’s family composition, health, and transportation choices are huge factors. And it doesn’t do much to acknowledge the profound inequality and discriminatory policies currently conspiring to make the housing market intractable in many cities. Some people really are stuck.

But a wealth of literature shows how the investment pays off when individuals are able to upgrade from poorer to pricier neighborhoods. That concept is the basis for the U.S. Department of Housing and Urban Development’s “Moving to Opportunity” 10-year experiment, where very low-income families given federal assistance to move from super-impoverished urban areas to higher-income neighborhoods showed marked improvements in health. The economist Raj Chetty has found that parents who move to a location where median rents are $176 higher can increase their child’s future earnings by 1 percent.

The takeaway? The explanation for why you live where you live may be more financially sound than you give yourself credit for. The rent check may hurt this month, but you could make it back, with interest, in the future.

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