Wednesday, August 27, 2008

The Non-Ownership Society

In my most recent post, I pointed out that -- contrary to widely cherished assumptions -- the supposed financial benefits of home ownership, compared to renting, are minimal to non-existent. Even taking into account the tax advantages from deducting mortgage interest and property taxes (the latter of which are disallowed for taxpayers who must pay the Alternative Minimum Tax), it turns out that many (even most) people could do just as well or better financially by renting their residences. Putting money into home equity is, for many people, worse than paying rent and putting their savings into other financial instruments. This is, of course, shocking news to Americans who have been told repeatedly that there is no better investment than their homes.

There is an additional financial disadvantage to home ownership that I did not emphasize. Buying a home violates the bedrock principle of safe investing: diversification. No responsible financial advisor would tell the average person to buy shares of just one company, or to put all of their money into a business venture with friends who want to, say, open a restaurant. In fact, one of the little-appreciated problems with 401(k) plans is that too many workers put all of their money into the stocks of the company they work for. (Insert bitter Enron comment here.) Nevertheless, our social norms and explicit policies encourage people -- all but beg people -- to pass up a diversified portfolio in favor of putting all of their money into one big asset. If that asset tanks at the wrong time, life is not good.

Even if people are wrong about the financial advantages for buying versus renting, however, it is still possible that there are other benefits of home ownership that outweigh the net financial benefits that renting would bring. Unfortunately, the supposed social benefits of home ownership are at best overstated, and their are other disadvantages to widespread home ownership that cut even further against the idea that everyone should own their homes.

Other than those mythical financial advantages, probably the most common argument in favor of policies to encourage home ownership is that home owners are more responsible than renters, creating more stable neighborhoods. The basic notion is that renters are rootless while home owners stay in one place for the long haul, giving only the latter the incentives to engage with their communities. In part, this is based on a misreading of the simple fact that younger people move around before they settle down and (mostly because they have low incomes and no money for down payments) are renters. The correlation between renting and rootlessness is, therefore, not proof that homeownership will cause people to settle down. In fact, as I mentioned in my previous post, the average home owner in the U.S. sells and moves after only six years. The rock-solid home owners living in the same house from age 25 until they enter a retirement village are anything but the norm.

Still, renters move more often, right? Not necessarily. In places where renting is a meaningful option for similar residences, meaning mostly in big cities, people often rent one residence for decades at a time. Many people who grew up in New York City, for example, lived in the same apartment from birth through college (and their parents continue to live in the same place). Many European cities have much lower rates of home ownership, yet neighborhoods are quite stable. People plant flowers in window boxes, neighbors look out for each other's children, crime is low, and all is right in Ozzie and Harriett's world. By contrast, when a person buys a home and knows that she will be leaving in a few years, there is little reason to become engaged with the local schools, community issues, etc. (My personal experience is unique, of course, but having owned five different houses for periods ranging from 18 months to 4 years, I can testify that owning can feel just like renting. From Fox Point, Wisconsin, to South Orange, New Jersey, I never attended a town hall meeting or joined an Elks Lodge.)

In other words, while the question of neighborhood stability is ultimately an empirical one, there is at least strong reason to suspect that we can have very stable neighborhoods without everyone being on the hook for a huge mortgage. When people stay put (or, more accurately, when they expect to stay put), they take the time and effort to invest in their surroundings and to become part of the community. This suggests that landlord/tenant laws are as important to neighborhood stability as mortgage interest deductions. Probably more so.

Moreover, as I pointed out in my most recent post, one major social and economic cost of home ownership is precisely that it ties people down. In the depths of the recession of the early '80s (the worst downturn since the Great Depression), President Reagan encouraged people to "vote with their feet," since there were relatively plentiful jobs in the Sun Belt even as the Rust Belt was earning its new nickname. This was fatuous, because the people in Michigan, Ohio, and Pennsylvania who might have moved to Arizona and Texas were financially tied to homes that had become nearly impossible to sell without the owner losing everything.

The economy, therefore, significantly underperformed because too many people owned their own homes. (Put another way, risks in the housing sector were not spread efficiently.) This, by the way, would be true whether or not there is a net increase in rootedness due to home ownership. That is, even if there is no difference in mobility between home owners and renters during non-recessionary times, the difficulty of selling for owners during downturns harms the labor market as a whole.

This discussion, of course, hardly covers all of the issues. (Among other things, there are serious environmental and energy-use problems associated with U.S. housing patterns.) Still, taken as a whole, it is quite surprising that home ownership continues to be held out as an unambiguous benefit to families, communities, and America.

In the next episode of what has become a series on the topic of home ownership, on Friday I will discuss the current mortgage crisis and why -- even though it was a bad idea to encourage so many people to buy their own homes -- it is essential for policymakers to continue to try to minimize and undo the damage that the current wave of foreclosures has caused.

-- Posted by Neil H. Buchanan