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Homeownership Myth August 22, 2007

Posted by federalist in Finance, Real Estate.
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For a long time Homeownership has enjoyed the status of Unconditional Social Good, right alongside such metrics as Employment or Life Expectancy.  Witness the degree of government intervention to foster home ownership — personal tax breaks (the mortgage interest deduction) as well as government-backed loans and loan subsidies.

Today Holman Jenkins explains that not every American should be buying a home:

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job.

Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.

I would point out that even wealthy individuals should not blindly assume that homeownership is right for them.

People often get hung up on the fact that renters don’t “build equity” the way homeowners paying off principle on a mortgage do.  Home equity has historically appreciated, but so have many other assets in which one could invest spare cash.  No money manager, looking at a home as simply another investment, would advise an individual to put a significant portion of his portfolio in a single house.

It is true that owning a home can sometimes be cheaper than renting, but that is a function of cyclical and regional market conditions.  Sometimes renting is cheaper — especially when one considers the illiquidity of individual real estate.

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1. Hamilton - August 23, 2007

Do you think that the feasibility or wisdom of home ownership has changed over the past century? How much? In the frontier spirit of old, our predecessors staked their claim and built their domiciles. Except for bursting hubs of immigration like New York, surely homeownership was the norm and sensible goal across our destiny manifested country?

In my view, home and land ownership is a fundamental, if not THE fundamental part of the American Dream. Obviously that’s a values judgment. The local chair of the Republican Party where I live says that “liberty” is the single most important thing… I say “private property.”

You argue that Americans should reevaluate home ownership today, but are there any economic policies that you could foresee making home ownership a real and universal Social Good (again if it ever was before)?

2. federalist - August 23, 2007

Excellent points. Like the Retirement Myth the Homeownership Myth is one that must have its roots in pre-Information Age America — an era in which a family could subsist so long as it had a plot of land to farm. A man was free if he could provide for himself. Slaves and serfs were those who depended on another man’s land for sustenance. The bulk of human productivity derived from working land.

During the industrialization of the 20th century people stopped farming for subsistence and the homes that sat on their shrinking private parcels became the vestigial symbol of self-sufficiency.

Land is no longer the coin of self-sufficiency. Today land is a liability. Real property is taxed and must be insured. And most importantly it is illiquid relative to all other productive assets.

Private Property may still be the most important accessory for Freedom, but the Property that will ensure a man’s freedom today is more likely to be artificial or intellectual. You’re more likely to get ahead with a college degree or enough cash to start your own business than with ten acres of arable frontier land.

If you were a young immigrant today which would you rather have: A $250k house in an arbitrary locale, or $250k in cash to invest in education, equipment, or business – and to rent what you need in the meantime?

3. federalist - October 18, 2007

Patrick Killelea maintains a popular blog that argues against home ownership.

4. federalist - November 19, 2007

Clive Crook also argues this month that homeownership may be bad for communities and the economy. Summarizes the WSJ. :

Citing research from Andrew Oswald, an economist at Warwick University in Britain, Mr. Crook says homeowners’ main problem is that they are less mobile than renters. Less willing to leave for greener pastures when the local economy falters, homeowners slow the nation’s economic growth and exacerbate unemployment when they stay put. Communities of homeowners also often suppress development by calling for new zoning rules.

Even if homeowners are more invested in their communities, more likely to vote and work harder to improve their neighborhoods, the overall societal good in homeownership isn’t clear-cut, Mr. Crook says. To that end, he questions the wisdom of the mortgage-interest tax deduction, a subsidy set up to ostensibly encourage widespread homeownership.

5. federalist - February 14, 2013

Robert Shiller estimates that, after accounting for maintenance and depreciation, real estate generates a long-run expected return of zero. I.e., it is essentially an illiquid store of value, not an “investment.” (Which from a financial perspective could still make it attractive during times like this where we’re fighting off high inflation while real risk-adjusted returns of more liquid assets may be negative).


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