Neil H. Buchanan

Mortgages, Housing, and the American Dream: Do We Really Need to Own Our Homes?


Thursday, May 28, 2009

As many readers well know, the current economic downturn is closely tied to problems in the housing and mortgage markets. The bursting of the housing bubble led to the subprime mortgage mess, followed by widespread losses in the financial markets, the collapse of once-solid financial institutions, and a once-in-several-generations recession that might still become a depression. Moreover, the subprime problem is now reportedly being followed by a wave of mortgage defaults and foreclosures of homes owned by people who are losing their jobs, threatening to set off another round of financial chaos.

These are indeed trying times, and it is understandable that policymakers are trying to do everything possible to prevent homeowners from losing their homes to foreclosure. The question that we seem to be avoiding, however, is whether the current crisis points to a larger problem not just in our financial markets but in our commitment as a society to encourage home ownership.

This might be the right time to step back and ask: Why do we try so hard to increase the number of people who own their own homes? It might be time to change ourselves into a nation of renters - not as a response to hard economic times, but because it really is a better idea for most people not to own their own homes.

Questioning a Proposition Near and Dear to Americans' Hearts

There is no doubt that this is heresy. The very notion of the American Dream includes the idea that two people marry, start a family, buy a house, pay off the house over the space of thirty years, and retire on the equity in that house. (This notion, moreover, is apparently not limited to the U.S., as I once saw a sign in Ontario for a home builder who has been helping people "achieve the Canadian Dream for over 30 years.")

In order to encourage people to start down that well-worn path, we offer tax deductions for interest on home mortgages (but no deductions for rent), we exempt the value of owner-occupied housing from taxation, and we have created extensive loan programs to finance mortgages. Perhaps more importantly, we have surrounded ourselves with a mythology that directly connects the idea of being an independent adult with a person's status as a homeowner.

Why do we put so much stock in the idea that people should own their own homes? One important justification has always been that home ownership provides needed stability to neighborhoods, based on the idea that people have a greater stake in their communities when they own property, giving them a reason to join the PTA, run for city council, and generally be a good citizen. Renters, by contrast, are seen as rootless wanderers. With such a stark contrast between our images of owners and renters, it is no surprise that policy has been driven by the idea that we need to encourage people to take the plunge and buy a house.

The Case for Home Ownership Is Far Weaker than Has Often Been Assumed

It turns out, however, that the justifications for encouraging home ownership are questionable at best. Even with the levels of home ownership that we see in this country, it turns out that people only live in their homes for a median of six years. Serial home ownership is thus the norm, and the supposed benefits of stable neighborhoods and citizens committed to the long-term health of their communities is difficult to square with the reality that people sell their homes quite frequently.

Even with all of the cultural pressure to own homes, people understand that home ownership is really just another form of renting. No wonder we often hear the sardonic comment, "I don't really own my house. The bank owns it and lets me live there." And indeed, home owners have traded one form of payment for another, and they have paid for the right to do so with a large down payment, high closing costs, and the knowledge that the process of moving will be much more difficult than it ever was as a renter.

Moreover, the supposed financial benefits of home ownership are hardly clear-cut. People talk about the tax advantages of mortgages as if there is no possibility that renting could still be a financially superior option. Even with that tax advantage, however, it is still quite possible for renting to be financially superior to buying. The New York Times, for example, has made an online financial calculator available to answer the question: "Is It Better to Buy or Rent?" Even assuming that the market for resale is steady - and even taking into account all of the tax and financial advantages of home ownership - it can take well over ten years for buying to surpass renting on a financial basis. For people who expect to move over much shorter time horizons (and that includes most of us), renting can be the much smarter choice.

The Recent Irony of Home Ownership: A "Safe" Choice Proves Disastrously Risky For Some

The current reality, of course, is that the market for selling houses has been anything but steady. People who dutifully spent years building equity in their houses, never missing a payment and even accelerating the payoff of their mortgages, are finding that they have lost money by owning a home. They also are finding that a factor that is not under their control at all matters very much: If neighbors abandon their homes, the neighborhood can become dangerous, with home prices taking a huge tumble.

This is the cruel irony of home ownership. People were given good reason to think that they were being smart by buying, only to learn that putting all of their eggs in one basket exposed them to catastrophic risk. This is the kind of investment strategy that no sensible financial planner would endorse, because it is the exact opposite of spreading risk. Diversified portfolios are safer than single investments, yet everyone closed their eyes and believed that this rule somehow does not apply if the single investment is a house.

There are, in fact, good reasons why the risk is actually greater in housing than in other types of investments. If the underpinning of the local economy dies (as in, for example, Michigan), who is going to buy a seller's home, even after the rest of the nation's economy recovers? In addition, as an article in The New York Times recently pointed out, many of the people who have lost the most in the current housing bust are the very people who have traditionally been shut out of the housing market, particularly minorities. Once they were finally allowed to partake of the American Dream (even on a non-subprime basis), the dream for these citizens became a nightmare.

The Arguments for Home Ownership Carry Some Weight, But Are Not As Strong As They May Seem At First Glance

Despite all of this, there are still reasons why people choose to own homes. One is the idea that owners can do things in and to their homes that renters cannot. Owners can decide whether to own pets (and how many), whether to paint the living room purple, whether to finish the basement, and on and on. The freedom to make these decisions without apparent limit draws many to the idea that there really is nothing like owning one's home.

Again, however, reality is at odds with the myth. Rentals can be found that allow pets. In fact, everything that one can do in a house can be done in a rental. The difference is that the renter will be given an explicit price up front for doing what she wants, whereas the cost of doing what one wants to a house is hidden until the house is up for sale. (Many homeowners have ruefully discovered too late the consequences of poor upkeep, bad design and fashion choices, and an unfortunate lack of curb appeal.)

The difficulty in thinking about a world with a lot more renting and a lot less individual ownership is that the market for certain kinds of rentals is currently quite thin. If policies were changed to encourage property managers to aggregate ownership of homes, then they could begin to take advantage of their ability to spread risks and to provide services on a scale that individual homeowners cannot hope to replicate. (Anyone trying to find a reliable handyman knows how chaotic the market for home services can be.)

Indeed, this process is already beginning to happen in some parts of the country, even without support from policymakers. In Phoenix, which has experienced extremely large decreases in home prices, reports indicate that entrepreneurs are buying homes out of foreclosure and renting the houses back to the prior owners. Apparently, the people currently engaged in these transactions plan to sell the houses back to the owners as soon as possible, but that is not necessary. With the appropriate incentives, we could expand the opportunities for people to live in single-family homes without putting their financial lives at risk.

For this process to move forward, we would need not only to change our attitudes about what constitutes "being a grown-up," but also to think seriously about the legal challenges that would arise with a move toward large-scale middle-class home rentals. Landlord/tenant laws would surely need to be scrutinized carefully to see whether they are adequate to deal with a world that is not driven by year-to-year leases and renters who are often financially marginal.

While mainstream economists typically disapprove of rent controls, for example, there should at least be options in place to allow people to lock in long-term rental contracts. One little-appreciated benefit of long-term rentals is precisely the increase in stability that comes from knowing that one will not face a big rent hike over a reasonable span of time, allowing people to settle in and become part of the community. Some of New York City's most stable neighborhoods include large numbers of renters who live in the same place for decades. The key issue is not owning-versus-renting, but staying-versus-leaving.

For this change to occur, policymakers in Washington and in the state capitals would have to come to realize that our emotional commitment to home ownership has cost us individually and as a society. We can still choose where to live and how to live, but we need not risk everything in order to do so.

Neil H. Buchanan, J.D. Ph. D. (economics), is an Associate Professor at The George Washington University Law School, where he teaches tax law and policy.

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