My USA Today oped is out:
Rent out the American Dream?
Homeownership has been a central tenet of a ‘richer and fuller life’ in the USA, but foreclosures are severely testing this model. A possible solution: Rent these homes as a first step toward a more affordable, flexible housing system.
By Richard Florida
For the past half-century, owning a single-family home has formed the cornerstone of the American Dream. James Truslow Adams introduced that phrase in 1931, at the heart of the Great Depression, defining it as the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”
Today, those two aspects of the American Dream — a better, richer life and homeownership — are in conflict. We could well look back on this moment and conclude that Americans acted as indentured servants to their homes. Single-family homeownership consumes an ever-larger share of income for far too many people, sometimes bankrupting them, but far more commonly severely constricting their way of life.
The system of single-family homeownership served us well for decades, helping set in motion a long wave of industrial expansion that fueled suburbanization and all the consumption that went with it. My father, a factory worker, toiled at the same Newark, N.J., eye-glass plant his entire working life. My parents lived in one house in nearby North Arlington, which they bought in 1959 and lived in until they died.
Though the housing system should no longer be allowed to put the nation’s economy at risk, President Obama has gone overboard with his plan to stabilize housing, stem the tide of foreclosures and breathe life back into the paralyzed mortgage market. His quest to reinvigorate homeownership actually acts against the flexibility and affordability needed for economic recovery. Less homeownership and more rental housing is what today’s idea-driven economy needs:
• Flexibility. The heart of a creative economy is flexibility. But homeownership is by definition inflexible. Various economic studies show that those who own homes, especially those who fill the ranks of the working class, are hobbled in their ability to respond to downturns in business cycles.
As homeownership rates rose, eventually reaching a peak of nearly 70% in 2004 — our society became less footloose. Last year fewer Americans moved, as a percentage of the population, than in any year since the Census Bureau started tracking address changes in the late 1940s.
This creeping rigidity in the labor market handcuffs our competitiveness. Economist Andrew Oswald has found that in the U.S. and Europe, places with higher homeownership rates also suffered from higher unemployment. During down times, homeownership can lock people into blighted locations and force them into work, if they can find it, that’s a poor match for their abilities.
• Affordability. Homeownership is also a financial albatross around the necks of too many “house poor” people. The rule of thumb used to be that you should pay 25%-30% of your income on housing. But the amount people pay has skyrocketed. Add in transportation, utility bills, food and clothing, and what’s left over to create demand for an industry’s goods and services? It’s reckless for Obama to propose foreclosure relief that would extend mortgage terms to 40 years and reduce monthly payments to 38% — or even 31% — of income.
On top of all this, homeownership doesn’t make us happier. A recent study by Grace Wong Bucchianeri, an economist at the University of Pennsylvania’s Wharton School of business, shows that, controlling for income and demographics, homeowners are no happier than renters and report higher levels of stress.
What about building equity in your home and taking advantage of mortgage interest deductions? If your home is now worth less than your mortgage, and you’ve already borrowed against the equity in your house, that’s the least of your concerns.
What’s needed is a complete overhaul as sweeping in scope as the one that brought to us the modern system of housing finance during the 1930s and the post-World War II homeownership boom. In his forthcoming book The Wealth of Cities, my University of Toronto colleague Chris Kennedy shows that real economic recovery and rapid expansion will come only from major upgrades in infrastructure, new housing patterns and significant shifts in consumption.
The foreclosure crisis, therefore, creates a real opportunity.
Let’s start with overburdened homeowners. Instead of resisting foreclosures, the federal government should facilitate them in ways that minimize pain and disruption. The government could work with banks and real estate companies to offer to rent each home to the previous owner at market rates, which are typically lower than mortgage payments, for a certain number of years. At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price. Some banks have started taking this step.
And what about the homeowners already forced into foreclosure? The government could help banks and large real estate companies turn these homes into rental properties, helping to clean up neighborhoods while providing affordable rental housing.
A bigger, healthier rental market, with more choices, would also enable millions of people to move and find jobs, which in turn would make the lives of more people and the nation’s economy more stable.
Richard Florida is a professor and head of the Martin Prosperity Institute at the Rotman School of Management at the University of Toronto.
March 10th, 2009 at 2:29 pm
This is interesting. My dad is a real estate agent (has been one for as long as I’ve been around), and I’ve been observing his work lately. These days, he’s been a lot more involved in rental transactions. Also, the market now rewards real estate agents for connecting landlords to tenants (the real estate agent gets to take home half of a month’s rent!). I even know quite a few high-end bank executives who have decided to rent vs. buying a home. The world is really changing! Before, renting was socially resented – you only would rent if you couldn’t afford a house. Even with the expansion of credit – and everything becoming “seemingly” affordable – people are preferring to rent.
March 10th, 2009 at 3:50 pm
Something doesn’t add up here. I would agree with your point that home ownership is sometimes a superficial dream that does not lead to a better life, but your solution of creating rental properties is not real. What do you suggest the banks do with the assets they are holding as mortgages? If the rent is not able to service the loans, who would subsidize the gap?
As you also suggest, a home worth less than the debt secured against it is death for an over leveraged home owner. Considering the current leverage of US banks, a new system that begins with the massive foreclosure you suggest is also death for the US banking system.
March 10th, 2009 at 3:57 pm
Excellent article!
I believe majority of the financially savvy creative class understand the logic behind renting and responsible borrowing, but the general public has been sold on something else.
Fractional reserve lending has gotten out of control and the general public has been sold on the idea of owning assets they cannot afford.
People have come around in the “lease vs buy” decision for cars, but are more stubborn in the “rent vs own” argument for housing.
The argument that rent is a waste of money and that “there is no better investment than in real-estate” has suffered a temporary blow with the housing collapse, but was never a solid argument to begin with. Putting a low down-payment on a house with a 25 year mortgage has you paying roughly the equivalent of your house price in INTEREST, let alone the loss of flexibility and tremendous risk during times of economic turmoil.
Paying a reduced rent payment, saving the difference and eventually purchasing a home (with a large down payment) puts you ahead of most buyers and provides max flexibility.
The deflation scenario of deferring purchases to a later date has people scared of buying assets (especially large purchases), i believe this explains the shift towards renting and that this is only temporary…Geithner and Bernanke have convinced Obama that the solution to this crisis is to not increase consumer savings to help deal with debt, but by increasing credit availability.
March 10th, 2009 at 6:16 pm
Naveed, you touched on a very important point when you mentioned the cost of interest on money paid back over a long period of time. I think the best value in ownership is to enjoy retirement without rent or mortgage to budget like my parents do. Ironically, it’s the retirement savings/insurance system that creates the biggest obstacles to home ownership.
If the money that presently goes into Social Security and the 401k or similar vehicle went into the mortgage instead, we’d be able to pay off a mortgage of nearly four times annual income in ten years instead of thirty, or in seven instead of twenty. But by trying to save for retirement while paying a mortgage, a home at just 3.5 times income requires a thirty-year loan, which costs around four times the interest of a ten-year loan.
If most homes were bought in only ten years and, say, a $400,000 home cost $300,000 less in interest, we’d have more prosperity and more flexibility. Richard, if that were so, would you change your thesis?
March 10th, 2009 at 7:28 pm
This is really brilliant stuff.
March 11th, 2009 at 4:07 am
It’s not that brilliant Omar. Bit of sycophancy going on here I think.
Many people see homeownership as an alternative to pensions, or to save an asset to sell to pay for their care in old age. If we are serious about encouraging renting to assist flexibility in the labour market, then we need to start creating secure pensions. That’s not happening at the moment, is it? Are you suggesting that people abandon their assets and trust the stock market to provide an income to pay rent in their old age? Are you really? Or, are you suggesting that people rely on state provision for their old age care? Yes, there are lots of people in the public sector dedicated to a decent level of care, but what are you arrangements for your old age care, Mr Florida? I can bet a lot of money that you’re not going to rely on your local authority to give you a bed bath when you’re 90.
A flexible labour market means fluid communities. Why should we sacrifice stable, supportive communities so businesses can exploit our labour, to make more profit for the man, which the workers then never see? What exactly is the point of this, other than letting the rich get richer at the expense of workers? Why are you so subservient to establishment interests, when you are pretending to promote “alternative” or “creative” lifestyles? You just want to destroy those alternatives – to extract profit from them, to commercialise them, to privatise them. That’s not an alternative – that’s subservience to capital.
As far as I can see, the “creative class” theory is a sop for establishment interests to subvert the subversive and privatise creativity. I am increasingly realising that you are the voice of the establishment, and you are the polar extreme of providing an equitable solution to promote equality that harnesses the talents and creativity of society – your theory aims to steal that talent and creativity for the benefit of the asocial, amoral and the conservative. Your father would be ashamed.
March 11th, 2009 at 5:55 am
Wow, nice personal attack for zero reason there, man. You might have had a decent point in there, but it is obscured by your belligerence.
March 11th, 2009 at 7:56 am
Richard,
very interesting piece and I think you are on to something for certain segments of society. (trapped, retirees, second home, heavy career travelers, career changers)…
all that said, for many people, strength comes from being rooted in a local community. this is jacobs stuff.
keep pushing this one Richard, i think there is something in there, especially for the trapped scenarios (Det, Pitts, etcc)…
March 11th, 2009 at 1:40 pm
There is historical precedent for this. In Victorian London, only 10 percent of the population owned their own homes. Even much of the aristocracy rented. I don’t know what the percentages were in the US, but I’m sure that they were very different than they are today. Also, housing was a FAR lower proportion of household expenditure. Granted, they spent much more on things that are now quite cheap, like laundry, for example.
This is a going to be a very hard sell to the general public. It goes against at least 60 years of conventional wisdom and practice. Some historical analysis would be useful.
March 11th, 2009 at 2:47 pm
Interesting related article from Mike Shedlock in regards to renting
http://globaleconomicanalysis.blogspot.com/2009/03/boomers-future-went-down-drain.html
March 11th, 2009 at 3:15 pm
If you’re willing to pay a premium for the mobility, I guess it’s ok. I think (speaking as a real-estate investor) that people could feel better about buying a home in the creative class cities (San Fran,Denver,Chicago,NY) and not be “trapped”, the way other people in different cities are. The studying of the creative class (who are going to be the leaders of the economy going forward), allows you to see the best real-estate markets to invest in.
I also agree in that a home is not really an asset; an asset either grows in value or pays you an income – a home usually costs 5% a year in upkeep (utilities,taxes,repairs,so on).
March 11th, 2009 at 6:18 pm
Money quote from Shedlock’s blog:
“These calculations imply that, as a result of the collapse of the housing bubble, millions of middle class homeowners still have little or no equity even after they have been homeowners for several decades. These households will be in the same situation as first-time homebuyers, forced to struggle to find the money needed to put up a down payment for a new home. This will make it especially difficult for many baby boomers to leave their current homes and buy housing that might be more suitable for their retirement.”
Perhaps it the saving for retirement, not the purchase of a home, that has become the problem. Everyone managing to make their payments on a 30-year mortgage actually earns enough money to buy their house in ten years, but for payrol taxes that cause mortgages to stretch several decades longer than necessary. The result of stretching out mortgages is that retirees have SS but, as you can see from the quote above, they still have mortgage payments. I think for those who wish to own a home the state should not throw up barriers to owning that home as soon as financially possible; in fact, it should encourage it as an essential component to retiring securely.
March 13th, 2009 at 3:10 pm
Renting in the private sector and then in the public sector was quite usual in the UK until 1932 when the combination of coming off the Gold Standard, some ahead -of-its day quantitative easing and low land prices led to some frantic speculative building of suburban houses for sale.After WW2 there was a virtual race between the private and public sectors to provide housing ,which was won by the private sector,(but after the Conservative Party stopped the taxation of homeownership with Schedule A of Income Tax in 1963 which had kept average house prices flat).
But surely renting is not going to be an attractive option if it is relatively expensive in comparison with paying off a mortgage?Cheap rents and cheap mortgage repayments might be equally conducive to attracting any creative people.
It is possible to consider the notion of the creative class in the context of Henry George’s ideas of keeping land prices ( and hence housing costs) down with a Land Tax.
Maybe when land and property prices hit rock bottom, levying a land tax to stop them going up again, would give creative people the chance to gather in like-minded communities and rent or buy cheap business and residential bases to renew the economy.
December 1st, 2011 at 9:08 pm
I think arteta is d nxt fabregas, while wilshere coming back is going to be a better chances for Arsenal