Sunday, June 13, 2010

The Case Against Home Ownership

I am glad to see Elizabeth Warren come out, sort of, in a way, against the fixation on home ownership. When I give talks about the economic crisis to community organizations, I get, at best, a blank stare when I launch into my diatribe on why most working class people should not be buying their own homes. Warren is worried about the asset market implications, but I am moved, at least initially, by Finance for Dummies. Rule number one: diversify. Don’t put all your savings in one basket. Especially not your home, since if something terrible happens to it, it will also likely put a dent in your living expenses. Buy index funds or dairy futures in Switzerland or anything, but don’t put it all into your home.

Nocera’s commentary is about how the government can reconfigure its interest subsidies, but just as important, if not more so, is strengthening the tenure rights of renters. In areas of Europe where renting is more popular and enjoys higher social status, it is also more protected than it is here. The rules governing rental agreements are local, and we are not likely to federalize them very soon, but imagine a scenario like this: Washington announces that it plans to withdraw subsidies for homeownership, but in doing so it wants to provide a better rental alternative. So, in coordination with academic specialists and various stakeholders, the feds hammer out a new model for local ordinances, perhaps even new language for rental agreements. The withdrawal of subsidies is tied to the uptake of the new rights for renters.

A side benefit is that mortgage balances level off and the nation’s finances become less ragged.

Worried that average folks won’t save enough if they don’t have that monthly mortgage payment demanding their attention? Other countries have used postal savings accounts for this purpose. Postal is too 20th century. How about getting families to play a multi-player internet game, something medieval with armor and magic potions, where you buy kingdoms with game points that you earn by depositing some money in a savings account? As long as our virtual warriors are not borrowing from the moneylenders (with players’ real money), we’re OK.


TheTrucker said...

There is no "case against home ownership" for those of us who are retired. There is no other firm and absolute rock on which to cling, and there is also no less expensive drain on the society than home ownership by the coots. We are moved out of the way and dispensed with.

Home ownership as a retirement vehicle is less risky than any other "investment". In the normal course of events, economic dislocation is gradual and losses can happen. But the entire "nest egg" is not lost just because one factory closed. Housing prices tend to fall slowly if we are not talking about financial bubbles. And once retired, most of the economic dislocation problems are gone.

Homes are not "poker chips".

Anonymous said...

The question of home ownership aside, it is difficult to see how average working people can increase their savings rate when wage growth has been stagnant for three decades.

Jonathan Versen said...

Your argument is short-sighted and wrong. People generally have to spend some portion of their incomes on housing, so they might as well get some equity. Money spent on housing is not just investment for the future, it's also a necessary expense. Would you make the argument that maybe you should divert all that money you blow on the light bill to a nice growth and income fund?

I've also heard the argument that because housing doesn't necessarily increase handsomely in value relative to all your housing expenses, it's a bad investment. This is also BS, because capital preservation still beats 20-30 years of rent with no equity to speak of.

I will agree that people shouldn't spend too much on an unnecessarily expensive house relative to their resources, but that's a different argument.

Shag from Brookline said...

As housing prices increased, so did local property taxes. But the bursting (partially) of the housing bubble has not significantly reduced property taxes, at least in the Northeast. So some retirees are in a sort of trap if they wish to stay in their homes even if free of mortgages. And reverse mortgages are not a good answer. What happens to property values if retirees are forced, in effect, to sell their homes (adding to the foreclosed properties already flooding markets)?

Jazzbumpa said...

Just to add to the confusion, I'll point out that my property taxes have gone down by more than 15% over the last two years.

My home now has a market value about 20% less than what I paid 12 years ago.

How does all this stack up against 1) income taz interest deductions and 2) not paying rent all those years?

Beats Me.

TheTrucker said...

It is totally wrong to evaluate the good or bad of home ownership on a time scale less than 20 years. That is just gambling. I have been buying a home for a very long time. The market value is actually not a relevant issue at this point. Sometimes I look at what I would receive as an annuity on the money if I was to cash out. It would not be all that good. After paying rent I would be a loser. I could speculate, guess right and come out ahead. Or I could speculate, guess wrong, and be in very deep trouble.

Shag from Brookline said...

I don't know where Jazzbumpa lives. But in my community, the assessed valuation of my home has basically not changed over the past 3 or 4 years. My tax bill for the current tax year ending June 30, 2010, increased by about $40. A couple of adjoining homes on my street had tax bills of slightly less than the year before. The current year's assessment was based upon the value as of 1/1/09. Perhaps the assessment for the tax year ending June 30, 2011 (based upon value on 1/1/10) may decrease. But I doubt that my actual tax bill will decrease to the same extent (proportionally). As for the "actual" value of my home, there have been virtually no sales of comparables in my neighborhood over the past two years, so I have no way of knowing.

Anonymous said...

This is silly. Unless you live in serious poverty (in which case you're not making any investments anyway), the only alternative to buying a house is renting. Why not put the money you would pay as rent into mortgage repayments instead?

Or: By renting, you're paying someone else's mortgage; why not make it your own?

Shag from Brookline said...

So all those who do not live in serious poverty (undefined), are silly for renting? Many in this category took on subprime mortgages to be homeowners. It seems that many of them - and their lenders, stockholders, investors - ended up looking silly and contributed to the financial/economic crises that hit the fan in 2008.

Suffern AC said...

On the payment level, yes, it often makes more sense to purchase equity in a house rather than paying a landlord. But there is a question for people who are able to save money for a 20% downpayment, whether they should continue to save or invest.

If, say, the first $100,000 of savings was protected in bankruptcy procedings and a certain tax break were given to net annual contributions to "post accounts", we might see a different set of decisions being made. As it stands, the purchase of the interest rate tax deduction is difficult to ignore. I can't imagine the mortgage interest deduction going away, so I guess we would need to add yet another layer of deductions.

A lot of effort went into creating the idea and offering products to create the impression that a bank loan and a real estate asset were equivalent.

Anonymous said...

In regards to home ownership as a retirement vehicle: I have seen alot of elderly people "trapped" in paid-off homes that have become a curse, rather than a blessing. One partner develops a terminal illness, and can no longer get up the stairs to the shower or bedroom. Of course, in the midst of this crisis, moving or renovation are impossible, and so the problem is dealt with by half-measures, such as placing a rented hospital bed in the living room, and"sponge baths" by home health aides. After that partner dies, the remaining spouse now faces heating and cooling a big house for one person, inadequate security/being targeted for burglary, inability to manage the house and lawn, high property taxes, etc. Yes, they could theoretically hire a handy man/renovate the house to make it more accessible, or the kids could help out, or they could sell the house, but, somehow, the kids never really are able or willing to do much, and all other options (especially selling) seem overwhelming and go against decades of thrifty habits and mental attachment to the house, and all it represents. And so they continue on somehow, living a much worse life than they would if they were willing to make the move into even a basic apartment with an elevator (never mind an expensive assisted living community), until they fall down the stairs, or while shoveling snow, and end up in a nursing home. After they die, the kids finally show up - to fight over the house.
Maybe the Baby Boomers won't do this, but this seems to be the overwhelming pattern with the WWII-era retirees that I know. Maybe people would be better served by investments/living arrangements that not only permit more flexibility, but which don't tap into their emotions so strongly. If you prefer home ownership, please think about these issues and try to plan for them, in advance.