Is the benefit of homeownership to society worth the subsidy cost?
Homeownership is considered a universal good by politicians. However, the benefits of ownership are not worth the costs of the subsidies politicians put in place.
For over 100 years, every presidential administration embraced homeownership as a panacea, quelling civil unrest, creating citizens with a strong sense of community. The goal of bureaucrats and lawmakers is to create a mythical society with 100% homeownership. The powers-that-be consistently promote homeownership, sometimes with costly subsidies with little or no real benefit.
Every homeowner wants to see the resale value of their home go up as rapidly as possible, and since most local governments obtain revenue from real estate taxes, government officials like high home prices too. Since more than half the country owns a house, political pressure mounts to prop up home prices and cause them to appreciate. Politicians are happy to go along. The result is a plethora of subsidies that make houses more expensive. Unfortunately, house prices can’t appreciate faster than the wages go up to support them. Any time prices are artificially pushed higher, they inevitably crash back down with horrendous consequences.
What’s worse is that all this volatility can be avoided. If people accepted that house prices can only rise so fast, then perhaps they wouldn’t get carried away with kool aid intoxication and overborrow to buy real estate as an investment. If governments accepted that some people are better off renting, we wouldn’t get policies designed to make everyone a homeowner whether they can sustain it or not. If homebuilders, realtors, and bankers accepted that some people shouldn’t be given onerous debt loads to buy houses (and generate sales commissions), perhaps we wouldn’t have such powerful lobbying for policies that are the root of the volatility in our housing markets.
Our obsession with homeownership carries a cost that’s much larger than the actual dollars and cents of the costly subsidies.
Plummeting homeownership rates are a worrisome sign that the American Dream remains a fantasy for millions. But they are also worrisome for another reason: they show that the housing crisis continues to afflict millions of families facing foreclosure or saddled with unaffordable, bubble-sized mortgages.
Those bubble-sized mortgages were embraced by politicians who saw homeownership rates rising along with those bubblicious house prices.
That’s a problem, because for generations of Americans, homeownership has been a gateway to the middle class and a primary source of wealth creation. What’s more, it is not just families who benefit when they own their homes: their neighborhoods and the entire economy do, too.
The housing market has broadly recovered from the 2008 crisis, but many Americans remain left behind. As of June, one million homeowners were facing foreclosure. Almost 7 million more were underwater, owing more on their mortgages than their homes are worth. For them, there has been no housing recovery. These working- and middle-class homeowners have seen their incomes stagnate — along with the value of many of their homes. What’s worse, they’re still on the hook for mortgages that are based on bubble-era valuations.
That’s the nature of cloud inventory. Those
homeowners loanowners will not participate in the housing market until they are no longer underwater. Even then, many more won’t participate until they have enough equity for a 20% down payment on their next house.
When these beleaguered homeowners see no path to financial well-being, they have no incentive to maintain their homes — meaning they lose even more value. And the exorbitant monthly payments they face mean that they can’t sell their house if they get sick or lose their job. They are stuck with the burdens of homeownership and none of the benefits.
Lenders and borrowers perverted the American Dream during the housing bubble as Americans began to define themselves by the size of their house. Wealth became confused with debt; appreciation became confused with income; credit became confused with savings. Rather than viewing the road to prosperity as one that required hard work and delayed gratification, Americans came to believe they could achieve success by simply purchasing the right house and living off the increase in its value. The new American dream required no work, no sacrifice, no experience, no expertise, and no risk, yet yielded unlimited rewards.
These perverted views of what it means to be American are so ingrained in the collective consciousness of Californians, that few remember the real American Dream.
Work hard, save money, pay off a mortgage, and live in your debt-free house on the investment income from your savings in your golden years.
In a sad way, I understand why people bought the fantasy. If offered to chose between working hard and sacrificing to obtain a goal or doing nothing and instantly gratifying all desires, most people will chose the latter. Unfortunately, reality has a way of exposing myths that are too good to be true, and the housing bust destroyed the illusions and perversions of the American Dream created by the housing bubble; unfortunately, no new mythos has yet emerged to take its place.
And the American Dream can be realized in a rented urban apartment just as easily as behind a suburban white picket fence.
It is a terrible mistake to artificially boost the homeownership rate by subsidizing borrowing. Before 2007, America chased the chimera of an “ownership society” and ended up creating a “foreclosure society” instead.
Homeownership is a good option for people who want to live in a single-family house for the next seven years or more. Homeowners can customize their property. They are hedged against rising costs of housing. Ownership creates incentives to maintain a home. Understandably, 84.4 percent of occupied single family detached dwellings are owner-occupied.
For Americans who don’t plan on settling in any one neighborhood, or who like dense apartment buildings, renting is more attractive. Renting saves the fixed costs of realtor’s fees, and limits exposure to housing price swing. In apartment buildings, renting avoids condominium fees and coop boards. Consequently, 87 percent of occupied units in multifamily buildings are rented.
There is little public benefit in pushing people to own rather than rent homes, just as there is little public benefit is squelching the market for leased cars. Homeowners are somewhat better citizens, but we shouldn’t screw up the $28 trillion housing market in the hopes of mildly increasing engagement in local politics.
Home ownership has been linked to greater community involvement and other positive societal goals. This link may or may not be true, but many in the government accept it as so, and this has long been used as a justification for a plethora of policies and misguided government subsidies encouraging home ownership.
However, Housing subsidies are detrimental to America. They do not raise the rate of home ownership, they cause house price inflation and volatility that inflicts financial pain and distress on the population, and these subsidies cost the government an enormous amount of money. Homeownership doesn’t need to be encouraged with government subsidies.
Moreover, when homeowners get involved in politics, they often try to stop new development which makes housing less affordable for everyone else.
Homeowners who pay off their mortgages or who are lucky enough to experience rising housing prices do become wealthier.
The American Dream is not dead. The idea of owning a home will rise from the ashes, and the American Dream will once again include owning the roof over your head and the floor beneath your feet. Personally, I would like to see a return to the traditional view of the American Dream: truly owning a home free of any debt. That’s where peace-of-mind reunites with the American Dream.
But making it easier to borrow reduces the need to save for a down-payment, and owners can also be hit by falling prices.
Subsidizing homeownership has bad side effects. Owners are less mobile, which makes it harder for them to move from high unemployment places to high wage places.
Since big apartment buildings are overwhelmingly rented, inducing homeownership pushes people away from urban centers. The American Dream can be realized in a rented urban apartment just as easily as behind a suburban white picket fence. There is no reason to stack the deck against America’s cities, which are more economically productive and require less household energy use.
We shouldn’t worry about less homeownership, but we should worry about high housing costs in America’s most productive places. But the right response to high housing costs is to permit more building, not to subsidize homeownership. Homeownership subsidies just push prices up further. America should never again use public policy to prod people to over borrow in the vain pursuit of high homeownership rates.
I am a supporter of home ownership — not loan ownership as it’s become perverted into — but real home ownership free of encumbrances like a hefty mortgage. Most people who achieve home ownership go through a period of indebtedness because few can save enough (or get gifts from relatives) to buy a house for cash. Those that achieve home ownership do so through disciplined repayment of mortgage debt without adding to it to supplement consumer spending via the home ATM.
Anyone who plans to stay in one location for five years or more should consider home ownership. It is advantageous to fix one’s housing costs with an amortizing fixed-rate mortgage, and over time, between house prices inflation and amortizing mortgages, equity builds up into a significant nest-egg useful in retirement. These are great reasons to become a homeowner.
While citizens consider many good reasons for homeownership, politicians find ways of ruining the benefits, often through misguided attempts to subsidize the costs.
The impact housing subsidies
Not long ago I received a letter from the City of Santa Ana detailing a program where they provide $40,000 of down payment assistance to buyers who meet their qualification standards. Think for a moment about what this does.
First, the number of applications who want this subsidy would obviously out-pace the supply because they are giving out free money. Second, the selected applicants are essentially lottery winners who gain a house on luck rather than merit. Third, and this is the most important point, the selected applicant will outbid the current, hard-working, wage-earning buyer and deny them their family home.
Where is the justice in that?