Is America’s system of homeownership just a mirage?
That’s the question Wall Street Journal economics editor David Wessel asks. The graph below compares the the peak homeownership rate, the current rate, and the percent of homeowners with positive equity for 10 of the largest U.S. metro regions. Less than half of homeowners have positive equity in their homes in eight of 10 of these metros: In Las Vegas, the figure is less than 20 percent.
A former mortgage professional writes:
I spent 10 years in the mortgage business… and I still cannot figure out why the interest on second mortgages and lines of credit is tax deductible? I used to see people buy boats and Corvettes with their lines of credit and it frosted me that all of us tax payers were subsidizing the interest. This area must be addressed. I think that a tax deduction for the interest paid on a mortgage should be limited to the primary mortgage only.
Commenting on this earlier post, Jack Burns writes:
Renting is a service I gladly pay for. We spend about $40 a day for use of a nice three bedroom townhouse on a quiet street, with a private yard, a larger park for kids in the complex and a city park 5 houses away. The AGO is at the end of the street. Walk to work, got rid of the car and no equity buried in concrete, dirt and drywall. I like my equity earning interest and dividends and accessible when I need it. I also like having money set aside for a surprise like a weekend trip to Manhattan, or a night at the Opera instead of a blown water heater or a leaky roof. I know many homeowners and they like it. It enables you to be fixated on a world of a couple thousand square feet knowing you need not think beyond that world. It’s very comforting, like being a religious fundamentalist.
When should you rent versus buy? It’s a question lots and lots of people are asking these days. Armed with intriguing new post-crash data on the relative costs of renting versus buying, The New York Times’ David Leonhardt suggested that the significant decline in real estate prices was making buying a home a much better proposition in a growing number of communities across the country. (The Times offers a great interactive rent-or-buy tool, if you’re currently thinking about this).
Leonhardt’s analysis provoked an intriguing debate among many of the web’s most thoughtful economics commentators. Ryan Avent, writing at Free Exchange, urged caution. Felix Salmon thinks housing prices still have a ways to fall, especially as inflation eats away at them. Robert Shiller, the Yale economist who initially identified the housing bubble, and the tech bubble before that, also believes real estate prices may still have further to fall. Leonhardt replies thoughtfully here and here.
On Morning Edition yesterday, I discussed the merits of owning versus renting your home with host Steve Inskeep. The ideal of homeownership is deeply ingrained in the American psyche. For the past half century, owning a home of your own has been the veritable cornerstone of the American Dream. We more or less take it for granted that homeownership is a good thing. Homeownership, it is commonly thought, goes along with higher incomes. It causes people to be more diligent, hard-working, and productive. It leads to stable families, stable communities, and higher levels of happiness and well-being.
But, a whole slew of recent research suggests that there are considerable costs as well as benefits to owning your home. A 1998 Federal Reserve Bank of Dallas study, undertaken well before the boom and bubble, provided detailed empirical evidence of America’s over-investment in housing. Yale University’s Robert Shiller, the world’s leading student of bubbles, housing, and otherwise, found that from “1890 to 1990, the rate of return on residential real estate was just about zero after inflation.” Or as Nobel prize-winning Columbia University economist Edmund Phelps puts it: “It used to be that the business of America was business. Now the business of America is homeownership.” He adds, “To recover and grow again, America needs to get over its ‘house passion.”‘ I delve into these issues in greater depth in The Great Reset.
One consequence of the economic crisis is that the rate of home ownership has been slipping, as the chart below shows (via Calculated Risk).
A growing number of economists and urbanists question whether the United States has put too much emphasis on homeownership and over-invested in housing. Ever since the Great Depression, America has generously subsidized homeownership through the tax code and by other means. Housing does take up a significant share of U.S. investment comparatively speaking; and, in some regions, real estate, housing, and construction made up a huge share of the local economy, as high as 25 to 30 percent at the height of the bubble, bigger than education, health-care, government, or manufacturing. I’ve argued elsewhere that the two American dreams – of homeownership and of unfettered economic mobility – may be in conflict, as homeownership, especially in downturns like today, impedes mobility and makes it harder for individuals to move to work and the labor market on the whole to adjust.
The benefits versus costs of homeownership is an important debate. On the pro-side, Joel Kotkin makes the case for homeownership in his recent Forbes column. Stephen Slivinski provides a thorough review (via Tyler Cowen) of the downsides of what he calls America’s homeownership bias.
Simply put, Americans may have overinvested in housing. This has been a worry of economists for a while. It’s a concern based on what they see when they compare the rates of return – profit per dollar invested – for a variety of capital types … “When you observe that the measurable rates of return are different across the sectors,” said the Dallas Fed study author, Lori Taylor of Texas A&M University, “you either have to conclude that there are substantial unmeasured returns across the sectors or you have to conclude that society would be better off with a reallocation of resources.” These unmeasured benefits would have to be very large – at least $3,600 per homeowner in America – for the investment imbalance to be explained …
Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that “from 1890 through 1990, the return on residential real estate was just about zero after inflation.” Throw in the costs of maintenance of the property and it’s easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments – the foregone investment opportunities elsewhere – go largely unseen …
Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating …A seminal study by British economist Andrew Oswald of the University of Warwick traced the link between unemployment and homeownership. Oswald looked at the United States, the United Kingdom, France, Italy, and Sweden between 1960 and 1996 and discovered that, on average, a 10 percentage point increase in homeownership tended to correlate with a 2 percentage point increase in the unemployment rate.
Recent studies of European data discover that you don’t see these sorts of correlations in areas with higher concentrations of renters. Renters are simply more able and willing to move away when their community hits the economic skids. In addition, workers who aren’t likely to move from a specific location might create frictions in the markets for labor skills. It’s a cost to the economy when people live in an area in which their skills are no longer valued. But there is a potential personal cost too: The overall welfare of that worker may suffer. Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.
It appears that the crisis is causing a shift from homeownership to rental, as the graph below (also from Calculated Risk) shows. This trend may end up being a good thing for certain homeowners and for the flexibility of the U.S. economy as a whole.
One thing we know about crises is they frequently bring about significant changes in the system of housing tenure. The Great Depression and New Deal innovations in housing finance and housing policy, plus the post-war boom and infrastructure building, brought a massive shift toward single family homeownership. My hunch is it’s time for new hybrid forms of housing tenure which mix the benefits of ownership with the flexibility of renting.
My USA Today oped is out:
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.
