Is Homeownership a Good Idea?

This is actually two questions in one. There is the personal finance version: Is owning a house a shrewd move for a consumer? And there is the broader policy one: Is home ownership something that the government should be Mcmansion_under_construction W. Marshencouraging as much as it does?

Both are good questions. The first is of great practical importance to many people. But the second is probably more interesting. And it is nearly impossible to discuss one without the other.

Brett Arends at the Wall Street Journal gives it a good try in his latest column, taking as inspiration a recent Time cover story that is entirely on the policy question, to write on the personal finance version.

He starts out by making the point that a Time cover reading “Rethinking Homeownership” is as good a sign as any that the real estate market is bottoming out. He shows us a 2005 Time cover reading “Home $weet Home” that was, in hindsight, a clear indication that the market was then about to peak. I do not disagree, but I would have been much more impressed with Arends if I hadn’t read this blog post at The Big Picture two days earlier that made the same point with pictures of the same two Time covers.

Overall, his advice on home buying is approximately sound. He winds up with roughly the same opinion on the topic as I hold, that buying a house is generally a good idea for most people, especially just now. And he marshals arguments that are no less sound for being obvious, e.g. prices are reasonable and mortgage rates are very low.

But he also cannot help himself but to pitch a house as a good financial investment, particularly as a stock market alternative. His reason to buy #7 (the column is in the form of a list of ten) reads:

7. It’s risk capital. No, your home isn’t the stock market and you shouldn’t view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

His disclaimer that a house is not a “way to get rich” notwithstanding, it is clear to me that Arends has missed what ought to have been the big unavoidable lesson of the housing bust, that houses are, at best, a store of wealth rather than a creator of wealth.

Moreover, some of his better reasons for owning are, arguably, creations of the government policy criticized in the Time article that he largely ignores. I count three: #2 mortgages are cheap, #3 You will save on taxes, and #5 it’s hard to rent a nice place.

Which brings me back to Time and the more interesting, if less often asked, question about policy. The Case Against Homeownership is thoughtful and worth reading, although I think it is basically wrong. (It makes a nice symmetry with the Arends article, which is clumsy but basically right.)

The Time essay begins with a faulty premise, confusing cause and effect. It assumes that the degree to which we are a nation of homeowners is a result of government subsidies for homeownership, rather than the other way around. This is at odds with history.

The biggest way that the government favors homeownership is via mortgage interest deductibility, a feature of the tax code that did not arise out of Washington’s desire to encourage homeownership. The first federal income tax in 1913 allowed deductions for all interest payments on the theory that they were business expenses and the intent was to tax only income, that is, net profit. In in those pre-consumer credit days, this was reasonable.

But seven decades later, when the tax code was being reformed, a blanket deduction for all interest payments made very little sense. So with just one exception, only interest paid to finance money making ventures, on margin loans to buy stocks, for example, would henceforth be deductible. That exception, of course, is the interest on a home mortgage.

Why was that exception carved out? Because of some philosophical desire to build a nation of homeowners? No. The politicians writing the law wanted to keep their jobs, something that would have been impossible if they had pulled the rug out from under the already existing nation of homeowners.

Similarly, the elaborate government sponsorship of the secondary mortgage market that began in the 1930s grew out of a desire to support existing homeowners rather than from a policy meant to engineer society. And the capital gains tax exclusion for home sellers is a benefit for those who already own homes rather than an incentive to buy one. (It was enacted in the 1990s as a replacement for an awkward carry-over scheme wherein you could avoid taxes by reinvesting your gains in another house.)

To be clear, I too think that these policies are bad. I am in favor of gradually phasing out mortgage interest deductibility. I think Wall Street is plenty sophisticated enough to handle a secondary mortgage market without help form Uncle Sam. (No snickering, please. Government semi-involvement had a lot to do with creating the mess we got into.) And we can live without the special treatment for gains and losses on houses, although I think the cost basis should be indexed to inflation.

Where I part company with Time is that I do not think that these policies, as misbegotten as they may be, have had such a profound impact on the way America lives. Houses are probably more expensive than they would be otherwise, and there would likely be a much more active house rental market, but without these policies America would look largely the same, with essentially the same resources devoted to the roofs over our heads.

The Time article lists many problems with homeownership as a ubiquitous concept, from decreased mobility to higher energy use. Underlying it all is the idea that we have been sold a bill of goods, that this is not how we would naturally want to live if only we thought about it clearly and without so much cultural and economic baggage. And, inevitably, the argument drifts into one about detached single-family houses versus urban living.

There are reasons people like living in leafy green suburbs. In Crabgrass Frontier, the 1985 classic on suburbanization, Columbia University historian Kenneth Jackson traces America’s centuries-long idealization of agrarian life. Cities accumulated industry and disease and accidents. Who wouldn’t want to escape to a home and yard of their own? But these days, Cleveland’s Cuyahoga River doesn’t catch fire, Pittsburgh has clean air, and fish markets and docks don’t ring the island of Manhattan — bike paths and baseball diamonds do. Cities aren’t for everyone. But maybe they would be for more people if we didn’t all feel as though at some point we were supposed to move to the suburbs and buy a house.

There exists a rather peculiar pro-urban school of thought that holds that cities are the natural state of developed human life and that suburban “sprawl” is an obvious monster to be tamed by government intervention. It is a very old school, dating back at least centuries, and possibly to the birth of cities. (The term suburb is from Latin, referring to the settlements under, that is outside, the walls of Rome.)

The book to read on that subject is Sprawl: A Compact History by Robert Bruegmann. In it the author makes the case that there is nothing particularly American about wanting to live in your own free standing house on a small green lot. It is apparently a universal human desire, something everybody wants and arranges as soon as they are economically capable.

We tend to consider suburbia as being particularly American because we naturally see it only at home. We think of Europe as being made up of dense mass-transit oriented cities set in an idyllic countryside because that is what it looks like to a tourist. But drive twenty miles out from the center of London, Paris, Frankfurt, or Rome and you will see lawns, driveways, and strip malls, just like here.

To be sure, the discovery that homeownership is not a failed experiment but a natural inclination does not mean that the government should subsidize it. On the contrary. But owning our own house is something that the great majority of us simply like to do, and that needs to be acknowledged. It is not an illusion and we did not get tricked into it.

I may have trouble with one or two of Arends’ ten reasons to buy, but I would add an eleventh. It may be the most important of all. Homeownership makes us happy.

[Photo – W. Marsh]

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