Inside Financial Services

Can We Please Stop Obsessing Over the Virtues of Homeownership?

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In her grudging defense of the GSEs, Bethany McLean still seems to think falling home ownership rates are inherently a bad thing, especially for poor people and minorities:

. . .  This summer, the Census Bureau reported that the homeownership rate had fallen to 63.4 percent, the lowest level in 48 years. (It had peaked at 69 percent, in 2004.) . . .  The decline is particularly pronounced in minority communities. At the Congressional Black Caucus Foundation’s annual legislative conference this year, housing advocates pointed out that the homeownership rate for the black population has decreased from nearly 50 percent in 2004 to about 43 percent, its lowest level in 20 years. It’s projected to continue to drop.

Pundits have argued that the homeownership rate was, and maybe still is, too high, because too many people were getting mortgages they couldn’t afford. But if people don’t own (and don’t sleep on the street), they rent — and rents have been steadily rising since 2000, while incomes have not kept pace. In the third quarter of this year, rents increased by 5.7 percent year over year, according to Morningstar . . .

So people should own rather than rent because rents are rising quickly? That may be happening lately, but over the long-term the costs of renting vs. owning tend to rise at the same rate for the simple reason that they compete against each other. In the meantime, I can think of other ways to help the poor and minorities besides urging them to saddle themselves with debt and chain themselves to communities whose economic prospects may or may not improve in coming years. Germany’s homeownership rate is just 53%, ten points lower than the U.S.’s, and the Germans seem to be doing rather well. The sooner U.S. policymakers drop their homeownership-as-panacea fetish, the better it will be for the people they are trying to help.

What do you think? Let me know!

13 Responses to “Can We Please Stop Obsessing Over the Virtues of Homeownership?”

  1. SGR

    You’re absolutely right Tom. Sadly, don’t expect politicians to heed your advice. This isn’t about doing what’s right.

  2. c smith

    Because Americans are such notoriously bad savers, home ownership (in a not-too-levered form) is often viewed as a vehicle for “forced” savings, and therefore a plus for the broader economy. As you point out, though, there are drawbacks to it, particularly with regard to reduced labor mobility.

    • j

      Agree — the “forced” savings account benefit is particularly helpful as a behavior tool (know self disciplined required), and it’s the primary driver why statistically home owners have a higher average net worth than non-homeowners. You could achieve the same benefit buying a rental house as well (with not-to-levered financing, as you say), but for many people that’s too daunting to pursue, particularly the poor and financially uneducated.

      Home ownership isn’t a panacea, but its a handy tool to build wealth for those people without the self discipline to squirrel away savings every paycheck. It’s more about driving behavior, less about education or logic.

  3. OnTheEndOfTheEarth

    Homeownership has been a cornerstone of public policy in the belief that “owning a piece of the rock” gives people a vested interest in society and their communities. The thinking in leadership circles has been that societies with a large percentage of ownership of land (viz homes) are more stable and democratic. But the question comes down to: at what percentage is this stability realized without having to increase society’s costs for higher percentages of ownership.
    You should also know that Germany has very strict rent control so that family members are able to inherit the “rights” to rent at the lower real costs in the property and when the building needs to get torn down, buying out their rights is common. Germany uses landlords to effectively reach the same goal of stability, shifting the financial burden to the landlords for a public policy of stable housing.
    On the other hand, the cost of owning a home in the USA is probably a lot higher than most people realize because of the real depreciation of the structural assets that periodically need to be rebuilt.
    Society needs to debate these concepts more fully so that each person can fully understand the cost/benefits to either owning or renting.

  4. etoleary

    Traditionally there have been three enduring factors in lifting people up into the middle class: homeownership, education and a vested interest in a defined benefit or defined contribution retirement plan. Any one of the three while useful is seldom sufficient. Our politicians clearly overdid the homeownership “leg of the stool” but we now seem to be approaching the long term rate of ownership that is sustainable.

  5. Banker

    While I think home ownership does in fact improve communities — knowing your neighbor, less migrant population, more invested into your communities/school systems etc — the govt fascination of home ownership is out of control and is not a public policy our federal govt needs to be pursuing (like many other misguided efforts like social safety nets, college, etc.)

  6. SWPilgrim

    Back in the day that this myth was invented, the rule of thumb for mortgage service and homeowner taxes was 25% of net disposable income, i.e. ” eligibility”. Unfortunately, in urban centers, short supply and overfinancing has driven this cost up to 40% or more, creating the bogey of housepoor, especially for first homes and involuntary one-income families.

  7. John Baltimore

    Owner occupied primary residencies have a high correlation with desirable neighborhoods, in my view. Rental properties are not usually maintained as well as owner-occupied, in my view.

  8. Chris T

    The additional cost of mobility is also being disregarded. If one assumes the annual price appreciation of residential real estate is 2%, then, it takes four year’s appreciation to pay for the embedded cost of realtors and mortgage origination.

    But is it four years or eight years? It’s really eight years because with that relocation, you theoretically absorb, on day one, those inherent costs in the purchase of your new home.

    My observation is that the trend toward new urbanism is rooted in the fact that young folks want social and professional destinations proximate and, if they want to change the location, they want to be able to do that without encumbrance of the baggage that comes along with home ownership.

  9. Ken Greenberg

    It’s true that there was a long held belief that owning a home leads to more pride of ownership and stronger neighborhoods. That was certaily true when you put 20% down and worked your ass off. It’s less true with government programs that require 3% or less down – too little skin in the game – the same issues we see in our tax code.

    I’m just waiting for Bernie Sanders to add free homes to his list of stuff. What the heck?

  10. Pat O'Brien

    The logic seems to be: “Lots of positive, responsible social traits are associated with home ownership, therefor is we give people a house they will become responsible, right?” Baloney, home ownership is a symptom of responsible people, not a cause of responsible behavior. People who have the discipline to defer personal expenditures to save for a 20% down payment are responsible people, the house didn’t make them that way.

    • Kelvin

      You state: Eventually, the new recession will cause a lot of deltufas, but what we are interested in is not the deltufas caused by the recession but the deltufas that caused that recession. Why chose between recession-caused deltufas or default-caused recession? Even discounting normal (recession neutral) or recession-caused deltufas leads to an understatement of the sought after magic at blame deltufas causing the recession because the net default difference is necessarily defined as deltufas causing the recession -the only other category identified. The default pool remaining after discounting recession-neutral or recession-caused deltufas likely still includes both of those categories. If the recession itself and the recession-causing (I’d say contributing ) deltufas are the result of the same cause, aren’t there likely to be included among the discounted recession-caused deltufas many that should be lumped with recession causing ones -i.e. recession-caused deltufas specifically caused by THAT particular recession? We’re trying to identify blame, not blame a particular default type and many from each category share the same blame artificial manipulation of the credit markets. If Bush sought to add 5.5 million homeowners to a nation that has approx 8 million new and existing home sales annually (even if the 5.5 is spread out over several years), that is a massive and wildly unnatural increase in demand. Please don’t forget the regular and non-minority loan applicant who would have qualified for, say, a $150k mortgage based on income, assets, credit score, proforma debt ratios, etc. When CRA approves that $150k at lower credit worthy levels of each, the original $150-qualified borrow and lenders extrapolate to develop a market for CRA-proportional credit the non-minority who saved and paid bills for $150k approval fills out the application for new no stated/verified Jumbos. I still don’t buy that minority deltufas caused the recession. Qualified non-minorites necessarily then qualified for greater debt than THEY could afford -larger values of risky loans by a larger number of (non-minority) borrowers. Equal opportuniy for the un- or under-qualified. Granted, equal opportunity created for a minority-speific purpose. Minorities aren’t to blame, their kidglove fondlers like Barney Frank are.So home prices at entry level soar (as they did) which either pushes entry level homeowners up a level (elevating owners of each level in turn) or entry level homeowners remain and borrow (and SPEND!) against equity. Both grow the economy wouldn’t $10T in annual consumer spending get a boost from $5T in paper real estate gains essentially converted to credit cards? But that growth (not only for continuation but to be preserved at some level) would seem to require continued demand. However, home ownership remained at fairly steady percentages of the population or grew manageably in pre-CRA America in the face a market equilibrium. This isn’t a typical recession. It is a ponzi bubble. And its bursting (causing a recession ) is sibling to the deltufas causing (or rather contributing) to it.The question isn’t recession-caused or recession-causing deltufas. No need to disaggregate. The question is what percentage of the chicken and egg mess is the result of the same thing overriding all private, centuries’ proven bank management and a race neutral credit market that is the minimal-margin-for-error base of our entire economy to advance social theory and transfer wealth to political constituencies. Note: just observation made by a non-professional, could well be missing important facts or entirely wrong.

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