But here’s a question rarely asked, at least in Washington: Why
should ever-increasing homeownership be a policy goal? How many people
should own homes, anyway? …In
effect, U.S. policy is based on the premise that everyone should be a
homeowner. But here’s the thing: There are some real disadvantages to
homeownership.First of all, there’s the financial risk. Although
it’s rarely put this way, borrowing to buy a home is like buying stocks
on margin: if the market value of the house falls, the buyer can easily
lose his or her entire stake. This isn’t a hypothetical worry.
From 2005 through 2007 alone — that is, at the peak of the housing
bubble — more than 22 million Americans bought either new or existing
houses. Now that the bubble has burst, many of those homebuyers have
lost heavily on their investment. At this point there are probably
around 10 million households with negative home equity — that is, with
mortgages that exceed the value of their houses.Owning a home
also ties workers down. Even in the best of times, the costs and hassle
of selling one home and buying another — one estimate put the average
cost of a house move at more than $60,000 — tend to make workers
reluctant to go where the jobs are. And these are not the best
of times. Right now, economic distress is concentrated in the states
with the biggest housing busts: Florida and California have experienced
much steeper rises in unemployment than the nation as a whole. Yet
homeowners in these states are constrained from seeking opportunities
elsewhere, because it’s very hard to sell their houses.Finally,
there’s the cost of commuting. Buying a home usually though not always
means buying a single-family house in the suburbs, often a long way
out, where land is cheap. In an age of $4 gas and concerns about
climate change, that’s an increasingly problematic choice.
Your thoughts?
June 23rd, 2008 at 10:17 am
Year ago I was searching a site where I could buy my house. I found really great site. It was called Fizber. There were great services. You can find them here http://www.fizber.com/sale-by-owner-home-services/index.htm
June 23rd, 2008 at 12:16 pm
In my view, you’re pretty dead-on on this issue.
I would still argue that real estate makes a good investment for most people, but the constraints and costs of ownership, and the realities of suburbia weigh heavily against the decision.
Four years ago, I gave up a 75-minute drive (each way) and my 3-bedroom semi-detached home outside of Toronto for a condo in downtown Vancouver. I now work from home and my clients are either in a 5 minute walk or another city altogether.
While I didn’t move because I wanted to ‘reduce my carbon footprint’ I certainly have (something like 8 tonnes less per year from commuting and a smaller home) while also improving my lifestyle tremendously.
Although we currently rent, I would own again because I do think it is a better gamble than the stock market. However, I would only choose to own a condo property like the one that I live in so I could rent it out and move away at a moment’s notice. Thereby providing me with both the mobility that I seek as one of the ‘creative class’ but also providing the long-term investment potential of real estate.
June 23rd, 2008 at 1:27 pm
Hmmm… to flip the coin upside down: information on home ownership levels — or trapped ownership levels — might be good material for marketing to a potential new employer for a region. If people cannot or will not leave, they might offer an affordable and agreeable workforce for someone. Actually, certain retailers, especially food retailers, might welcome an opportunity to move into such a suburb too. People will shun driving too far because of the costs.
June 23rd, 2008 at 1:28 pm
If we want to encourage rentals as a lubricant for economic change, municipalities and school districts need to get as much (or more) tax income from rental properties as they do from homeowners. Moreover since renting frees a person from long-term commitment to a place, renters may lack the incentive to be good neighbors. There may be extra costs for building repairs, police protection, clean streets, and social services that good neighbors provide for each other. And too many landlords neglect their properties. It’s no wonder that an increasing percentage of rentals commonly is viewed as a sign that the neighborhood is going downhill.
The ‘rental life’ might be improved through some sort of collective action: while the individual renter may be transient, a tenant’s union or other sort of organization might provide a continuous community presence. The tenant’s union primarily has been used to counteract the power of bad landlords, but it could do more. It could provide networking or other social supports for transient residents. It could be a place for homeowning neighbors to seek redress of grievances. A national organization could provide continuous service to peripatetic renters wherever they may be, as well as lobby for renters’ interests. AARP is a useful comparison. It uses a nominal membership fee to attract a mass constituency, derives income from various services marketed to its members, heightens members’ awareness of their common interests, and is large enough to have lobbying clout.
June 23rd, 2008 at 1:56 pm
Interesting read but not sure I buy the whole argument. Don’t think you’re tied down owning a home. There’s always the option of renting the home out. I have American friends who live in London and own homes in NYC, Philly and LA. I’ve considered buying property in Canada even though I don’t think I’ll move back there. Home ownership as an investment has to be seen as a LONG term investment, you have to be prepared to ride out the dips. Like any other investments best to buy low and sell high.
June 23rd, 2008 at 7:36 pm
Here’s a great article titled “the Color of Credit”: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/22/AR2008062201550.html
Once again, the folks truly being hit by the housing problems are the already socio-economically disadvantaged. Sure, there are anecdotal stories out there outside of the subset of the article but they are few and far between on balance.
I don’t like the correlation to race as opposed to socio-economic status used by the article but it nevertheless drives home a compelling point.
June 23rd, 2008 at 11:54 pm
I think Krugman’s argument is about the short term, not the long term. In the 35 or so years since I bought my first house, my investment’s value has gone up 3,300% (counting a few moves, but carrying the principal forward). During the same time, the Dow Jones has gone up 1,100%. Granted I live in a “Superstar City”, but even so it’s significant. Not being Warren Buffett, I doubt if I could have done as well in any other market, certainly not a low risk one. And I doubt if I could have afforded to pay rent and invest as much in addition.
Beyond the financial side, when I’ve wanted to paint or even remodel, I didn’t have to get permission. There’s a sense of security to owning a home, like a favorite blanket or comfort food meal — intangible but not unimportant. From an economics theory point of view, renting and owning may be equivalent choices, but we don’t live our lives in theory. Both Richard Florida and Paul Krugman own houses.
June 24th, 2008 at 7:40 am
A few points I’d like to make:
I’m sure at least some are already familiar with the landmark study comparing home ownership rates and unemployment rates. Cities with higher rates of ownership, it was found, also had higher unemployment rates. Someone (or a family) living in a rental unit can much more easily pick up and leave for better opportunities than home owners.
Many homes (especially the newer ones) are governed by covenants that forbid rentals. The condominium I live in forbids more than 25% of the units being rented out. I believe the single-family subdivisions under 0% rental covenants would stand to benefit by changing that rule to 25%.
To address Zoe B’s argument: Where I live (in Atlanta), municipalities and county governments have a huge incentive for encouraging more rentals. We get homestead exemptions on property taxes. Now, if only the most vocal citizens were convinced that rentals are not just full of “transients,” local elected officials wouldn’t be so tied down to also favoring home ownership.
I agree with all of Krugman’s arguments, except in the comparison of borrowing to buy a home and buying stocks on margin. Real estate tends to stick around. Businesses, in contrast, can go bankrupt.
June 25th, 2008 at 1:40 pm
I think we have to be careful when we don’t apply business economics to personal finances without qualification – while businesses will often rent (or lease, in the case of cars) because they can write off the entire amount as a ‘business expense’ (compared to just depreciation if they were to own), people can’t use write-offs the same way, and the argument fails once the person in question stops working, and by extension, paying significant taxes.
While the article points out several disadvantages to home ownership, it does not look at either the long term in general or the short term advantages. Like Michael Wells (above) pointed out, owning a home provides a peace of mind that is hard to put in economic terms. As well, traditionally, home owners will have paid for their homes by the time they retire, and thus have the financial benefit of not having to pay rent when no longer working, and have the peace of mind that their landlord can’t decide to kick them out after 30 years on 6 months notice.
I am not yet in a situation where I can afford a home, but look forward to the day when I can say with pride “I own the roof over my head.”