Dec052014

Renters need more opportunities to build wealth

Instead of encouraging home ownership as the best means of acquiring wealth, perhaps government policy should encourage saving and investment among renters.

make_a_dealIn a recent post I noted that Renters can acquire wealth as well as homeowners. And while renters can acquire wealth, the system of tax incentives and government policies doesn’t make it easy. Perhaps now that the idea that real-estate-always-goes-up is exposed as a dangerous illusion, the family home can no longer be relied upon to anchor the middle class’s retirement and wealth-building plans. The middle class learned painfully the folly of putting their entire nest-egg in the wrong basket.

Government policy strongly favors home ownership mostly because politicians embraced the same delusions as everyone else concerning wealth-building and retirement. Since the supporting basis for the policy is now in question, perhaps it’s time to think outside the box and look for other ways people can build wealth outside of home ownership. But before we can consider alternatives, we need to fully abandon the idea that home ownership should be supported at all costs. Unfortunately, many still cling to the delusions of the past.

Homeownership and Wealth Creation

By THE NY TIMES EDITORIAL BOARD, NOV. 29, 2014rent_not_for_losers

Since the housing bust, renting has been in and owning a home has been out, especially among young adults who in earlier decades would have been first-time home buyers. As the rate of homeownership has declined, from a peak of nearly 70 percent in 2004 to a 20-year low of 64.3 percent recently, the number of owner-occupied homes has barely budged, while the number occupied by renters has increased by nearly 25 percent.

Those trends have led to questions about the future of homeownership. Would more and longer rentals be a bad thing? Are the benefits of homeownership overrated? The answer to the first question is yes; the answer to the second is no.

The answers offered by the New York Times Editorial Board is wrong on both counts.

Homeownership long has been central to Americans’ ability to amass wealth; even with the substantial decline in wealth after the housing bust, the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little if any wealth.

Isn’t the real problem then that renters are not encouraged to save enough?

There are many reasons homeowners have more wealth than renters, and most of them have nothing to do with the house.

Renters tend to be younger and earn less than homeowners. Wouldn’t one expect people at 50 to have more wealth than they did at 25?

Clip Art Graphic of a Yellow Residential House Cartoon CharacterRenters don’t save as much as homeowners, but that’s mostly due to the amortization effect on the home mortgage. It used to be that homeowners had to develop better habits of saving, but with zero-down loans and even now with 3.5% down loans, saving for a down payment is not terribly burdensome.

A recent study by researchers at the Joint Center for Housing Studies at Harvard University analyzed the reasons for these differing outcomes. Paramount among them is that homeownership requires potential buyers to save for a down payment, and forces them to continue to save by paying down a portion of the mortgage principal each month.

This effect is significant in households with the discipline not to raid this savings account with mortgage equity withdrawal.

Renting, in contrast, offers the potential for comparable wealth building only if renters invest an amount equal to a down payment plus any savings from renting. As a practical matter, most renters do not do that.

This is where we need to step outside the box and think a little. If the problem is defined as “renters do not save enough and need to be encouraged to save more,” then a number of solutions present themselves that have nothing to do with home ownership.

Perhaps we should subsidize savings by giving it a tax break. We already do this with retirement savings to some degree, but it has many caps and restrictions that could be relaxed.

What if we had retirement savings matching up to some threshold paid by the government, similar to 401K employer plans?

We could exempt the interest on savings from income tax up to certain thresholds.biggest_saver

I don’t necessarily advocate any or all of these ideas, but it demonstrates that there are many ways we could encourage saving and wealth building without subsidizing or encouraging home ownership.

Even in instances where renters have excess cash, saving a substantial amount is difficult without a near-term goal, like a down payment.

If this is truly a problem, then why can’t we give renters some other near-term goal to save toward? What if renters were offered tax credits for each $10,000 they saved? That would give them an attainable short-term goal with a specific reward.

It is also difficult to systematically invest each month in stocks, bonds or other assets without being compelled to do so.

Most financial planners advocate paying yourself first as a method of forcing savings by viewing the saving payment as a bill. It’s psychologically effective.

The analysis does not downplay the risks of homeownership or the devastation of the housing bust.

Yes it does, particularly since none of these are mentioned. The loss of value on highly leveraged investments is financially devastating, and this risk was only ignored because people held the collective delusion that real estate only goes up.renting_is_better

But the lesson of that debacle is not for individuals to avoid homeownership or for policy makers to devalue its importance.

Why not? I believe that is exactly the lesson individuals and policy makers must learn if we are to move toward a more stable housing market and retirement savings system.

Rather, the lesson should be to foster conditions under which middle- and lower-income Americans can sustain homeownership and avoid the ruin of foreclosure.

We tried that for most of the last 100 years, and the catastrophic failure of that policy lead to millions of foreclosures and the largest loss of middle-class wealth ever recorded. It’s a failed policy, and advocates refuse to admit the obvious.

For starters, legal and regulatory protections against practices that inflated the housing bubble need to take root. The Dodd-Frank financial reform law, for example, requires lenders to ensure that borrowers have the ability to repay their home loans and outlaws complex mortgage terms that enrich lenders but expose borrowers to payment shocks. …

The Dodd-Frank law will do much to prevent future housing bubbles, but just because we won’t deflate the prices of houses if they become overvalued again doesn’t mean that we should encourage home ownership at all costs either.American_Excess

Equally important, larger economic forces that make homeownership less possible for working people need to be in the forefront of political debate — even if Republican control of Congress makes actions to address them unlikely.

The forces that make homeownership less possible for working people should be at the forefront of public debate; unfortunately, very few people have even the slightest idea why its a problem. If policymakers and the banks hadn’t conspired to restrict inventory to reflate the old housing bubble, housing would be affordable, and homeownership would be much more possible for working people than it is today. High prices are the problem.

Long-term wage stagnation, for example, has made it increasingly difficult to accumulate enough for a down payment,

Isn’t this really a problem of entitlement? If wages aren’t growing, then people need to cut expenses in other ways. The saving habit doesn’t depend upon income.

and has led many homeowners to refinance their mortgages in order to pull out equity for consumer purchases.

Complete and utter bullshit. If people are extracting their equity to pay their lifestyle costs, they are running personal Ponzi schemes and supporting unsustainable entitlement spending.

The solution is to lift wages, not only with new policies like higher minimum wages and toughened labor standards, but also with approaches to managing the economy to ensure that a fair share of growth goes to wages and salaries, rather than going disproportionately to corporate profits.

They pull out the standard left-wing nonsense policy soundbites.

Renting can make sense as a lifestyle choice or because of income constraints. As a means to building wealth, however, there is no practical substitute for homeownership.

Their summation is actually the best possible statement of the problem. We need to create practical substitutes for homeownership as alternate means of building wealth. Homeownership is not the answer, and continuing to support a policy that failed miserably is a step in the wrong direction.

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