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]

No Comments

  • By Matt, September 17, 2010 @ 1:39 pm

    >Homeownership makes us happy.

    This last line seems be embedded in your entire argument. Isn’t it worth questioning WHY it makes us happy? What if we’ve been socially pressured into thinking we’re supposed to own?

    Regardless as to how the government incentives to own came about, they do reinforce the “common knowledge” that owning a home is a universal life goal.

    I feel like saying “homeownership makes us happy” is a way to rationalize a potentially irrational social norm.

  • By Frank Curmudgeon, September 17, 2010 @ 3:09 pm

    Why does anything make us happy? What makes chocolate taste good? Sometimes there is no rational answer, humans just like certain things.

    I don’t think the desire to own a home is the result of social pressure or a cultural bias. It seems to be too widespread around the globe and throughout time.

  • By Matt, September 17, 2010 @ 3:32 pm

    Buying a home is a much more consequential act than eating chocolate though, which is why I think the fact that people like owning is not a very good reason to support it.

  • By jim, September 17, 2010 @ 3:41 pm

    From 1900 to 1940 the home ownership rate was around 45% (+/-2%). Then the rate climbed posted WWII through the 1950′s to hit >60% level in the 1960′s. Since then the rate has been >60% and very slowly creeping upwards.

    Seems to me that the big change came after WWII and the boom in US industry/economy afterward as well as the baby boom.

    I don’t see the tax policy coinciding with change in homeownership rates.

  • By Frank2, September 17, 2010 @ 4:50 pm

    Frank,

    40% of Germans own their own home while nearly 70% of Americans do – I think gov’t policy explains 80% of that gap.

  • By Frank2, September 17, 2010 @ 5:00 pm

    I don’t think the desire to own a home is the result of social pressure or a cultural bias.

    Partly it is.

    I’m sure you’d agree that in most markets, if you’re planning to move in less than 5 years, it may make sense to rent. If you do rent you will get curious comments and stares from your friends, relatives and co-workers.

  • By Frank Curmudgeon, September 18, 2010 @ 9:41 am

    Frank2: I agree that government policy explains much of the German vs. US gap, but it’s German governmnet policy, not US government policy, which was the topic of the post. Amongst the things we Americans need to get over is the idea that we are exceptional in our rate of homeownership. The UK, Spain, and Mexico all have higher rates than we do.

    Renting is a strange thing to do, and a hard thing to do, and that is a direct result of government policy. But I don’t think that without the government subsidy for owning we would all be renters. I think it would go from almost unheard of to merely uncommon.

  • By Josh, September 18, 2010 @ 3:31 pm

    Matt, owning my own home makes *me* happy because it gives me control of my environment. When I rented, I couldn’t paint a room or change the carpet, and there were restrictions on everything from hanging pictures to outdoor grilling. I can understand why the owner wanted those restrictions, but they certainly reduced my enjoyment of living there.

  • By frank2, September 18, 2010 @ 10:59 pm

    Josh,

    And that’s great. But, I have friends who feel the same as you and they are 100k upside on their houses. If they get laid off and/or have to move they are looking at a pretty significant financial crisis.

    I think people would be better off if they at least acknowledge that the ability to grill, hang pictures and paint might end up costing them significant sums of money. That freedom and control isn’t free.

  • By Dasha, September 19, 2010 @ 10:12 am

    I, for one, am not one of the EVERYBODY who wants my own little house on a little piece of land. The way I grew up (in Moscow) happens to be the same way that my husband grew up (in NYC) — small apartment in the city, house on a large piece of land in the countryside on the weekend. Guess what our dream is? For many of those who grew up in the suburbs (who comprise more and more of the American population), the suburbs ARE the dream.

    So no, I don’t think this dream is universal. But I don’t think it’s uniquely American, either.

  • By Stagflationary Mark, September 20, 2010 @ 12:07 am

    Where are the jobs going to come from to support the growth in household formation?

    http://illusionofprosperity.blogspot.com/2010/09/households-vs-payrolls.html

    Renting gets such a bad rap. I rented until I was 33 years old. Renting allowed me to be mobile and move from job to job painlessly, which is especially important in a society that no longer offers workers semi-permanent employment.

    Those who bought in Detroit can tell us all about that. Their Silverdome sold for just $583,000 in 2009. It sits on 127 acres and seats 80,311.

    http://en.wikipedia.org/wiki/Pontiac_Silverdome

  • By In Iowa, September 20, 2010 @ 11:57 am

    I grew up in Iowa, where practically everybody owns a house with a lawn. I recently moved back here after living in New York City for five years and traveling broadly. There was never any question in my mind that I (with my wife and daughter) would own a home, on a substantial lot. We now own a tiny house on a one-acre lot in a small town. We are taking advantage of all tax incentives available to us, but none of them contributed to our decision to own.

    Why? I think people want to own their home because (consciously or not) it generally comprises landownership, which uniquely confers permanence, freedom, and power of self-determination on the owner. Throughout recorded history, humanity has fought and died for control of land. What did every Roman soldier want to receive upon his discharge? A parcel of land to farm.

    No, we are not all farmers, and we cannot all be (or can we?). But show a lifetime city-dweller how to plant and raise a garden, and suddenly they look like they found a part of themselves they didn’t know existed.

    On the other hand, just try growing a garden in Manhattan. I did it; it wasn’t easy (to put it mildly), and if you think people in the suburbs look at you funny when you say you rent, try telling people in Manhattan you have a garden.

  • By Josh, September 20, 2010 @ 2:23 pm

    Frank2, I agree with you. And in my case, that extra risk is worth it. Of course, it helps that I was able to buy my house after the bubble popped. If I had been thinking about buying in 2008, I probably would have decided it was too expensive.

  • By Neil, September 21, 2010 @ 12:08 pm

    I’ve been continuing to think on this post, since I knew there were a couple things I felt were wrong with it.
    1 – On sprawl, you suggest that just because it’s a common (possibly even natural) desire, that it’s something that government shouldn’t fight. Even if we accept your premise that sprawl is natural, good government can still be about manipulating people into accepting something which is for the public good, even if it reduces their individual happiness. So being a natural desire isn’t an argument for no government intervention to reduce sprawl.

    I’ve also read several studies that suggest the tendancy to sprawl is part of a deeper psychological problem in humans that we’re bad at figuring out what actually makes us happy. Specifically, these studies have found that the daily stresses of commuting tend to make people in the suburbs less happy than their more cramped urban counterparts. It’s seemed to me that the suburbs are a good option for people who can work close to home, but most cities are set up with dense business neighbourhoods downtown, so most suburbanites end up spending hours in their car.

    2 – You use home ownership and suburban Single-Family Housing home ownership interchangeably in your post. And then go on to say that European suburbs are the same as American ones. I’m here to say you’re wrong on both counts.

    I have lived in European suburbs, and my experience is that the tendency there is towards smaller homes, usually semidetached and sometimes row-housing, and much smaller yards than the North American standard. Single family housing exists, but is much less common. The result is still suburban, but a much denser suburb which also allows better movement by public transit. European suburbanites still own cars, but much fewer of them use them daily.

    And now, I am a homeowner in North America, but, like the majority of people I know, own a city centre condo. Home ownership is not synonymous with the suburbs, though you try to address the issue here as if it is one and the same.

  • By Bluto, September 30, 2010 @ 6:28 pm

    It would be interesting to see a study that separated out the real increases in home prices from the inflation protection that a traditional refinancable 30 year fixed rate mortgage brought homeowners.

    I suspect the latter has been a tremendous wealth generator over the last 60 years. It would probably be cheaper to have a Freddie/Fannie like firm offer interest rate swaps to consumers rather than guarantee home mortgages.

  • By Marsha Killington, Colonial Heights VA, May 14, 2011 @ 7:48 pm

    [i]…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.[/i]

    Now that’s just silly. May I introduce you to Fifth Avenue, Park Avenue, Central Park West, London, Paris, Rome, and a hundred other urban environments filled with super-rich people who can live anywhere (and anyhow) they want?

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