-- Posted by Neil H. Buchanan
Hypocrisy!! The State of Maryland recently registered a deed for fee simple ownership of land (on which a single-family home sits) to one Neil H. Buchanan. Granted, there are a dozen or so Neil Buchanan's in the world, including an English "Television presenter/producer, musician, guitarist, Actor" who once hosted a children's TV show called "Motormouth." There is also a mugshot of another Neil H. Buchanan here.
But there is no doubt that this deed was registered to the guy who teaches tax law at The George Washington University. How could this be?! Professor Buchanan has been on a years-long crusade to convince the world that individual home ownership is both individually risky and socially damaging. Of a countless number of posts on the subject, the most recent can be found here -- from only two months ago! He says that the mortgage interest deduction is a bad idea, that corporations should own single-family homes and rent them to families and individuals, and he offers other radical arguments that deny the importance of home ownership and the American Dream.
What is going on here?! First, yes, I closed on the purchase of a house last week. Second, no, I am not a hypocrite (at least, not in this regard). But, as Sen. Coburn so artlessly said of then-Judge Sonia Sotomayor, I "have a lot of 'splainin' to do." What gives?
If I had my way, we would never have developed the social norms that elevate the notion of individual home ownership into its current near-mythic status. People believe that home ownership is necessary to having stable neighborhoods, to promote financial stability, and so on. The problem is, it is all just not true.
Even if those positive social externalities were not imagined, however, the difference between owning and renting is, as an initial matter, simply a legal distinction. Especially for those with mortgages (who, as the saying goes, "are allowed to live in the house that the bank owns"), there is no fundamental difference between renting and owning. (Even for those without mortgages, the opportunity cost of buying a home with cash -- and thus holding that money out of other investments -- is the same as rent.) Everything else -- the conditions under which ouster is possible, and so on -- is part of the system of property law. Those legal differences are often of profound importance, but none of them need be connected to one type of occupancy and not another.
Nevertheless, our laws (certainly including the tax code) are consciously designed to encourage home ownership. Even if there need be no substantive difference between owning and renting, there certainly are many substantial differences under the current legal regime. Many people, therefore, argue that it is simply a matter of good financial planning for everyone to try to own their own home. In fact, a virtual sub-industry exists to convince people like my students (mid-20's professionals) that they are not truly grown up unless they own a home.
One of the key arguments offered in defense of that absurd proposition is that the mortgage interest deduction is "the great middle-class tax break." In a way, that is a true statement, in that most people who itemize do so because they own homes. They reduce their tax bills by deducting their mortgage interest (and, under a different tax provision, their property taxes). The next step, however, is not true: Because of this tax break, middle-class people "throw away money" by paying rent to a landlord, rather than building equity in a house.
This is an empirical assertion, masquerading as a categorical truth. Even after taking into account the increased ownership stake that is part of each principal-and-interest monthly payment, and even after taking advantage of all tax breaks, it is still possible that renting is cheaper than owning. In fact, given that so many people are convinced that the better choice is always to own, the artificially reduced demand for rentals (which is the mirror image of the artificially increased demand for ownership) should systematically make renting cheaper than owning.
Before the recent financial crisis, we did not know how much damage could result from individual home ownership, in terms of the risks associated with a completely non-diversified portfolio. We now know that this, too, is a huge cost -- to both individuals and society -- of our obsession with home ownership. Foreclosures on a massive scale continue to haunt the economy.
But back to my new status as a homeowner. I have never told my students that there are no circumstances in which one should buy a home. The simple economic story that I told above -- like all simplistic economic tales -- depends on several unstated factors. The most important of these is that there are reasonably deep rental and purchase markets for similar homes. In many cases, that is not true. Once I had chosen the town in Maryland where I wanted to live, I learned that there were almost no rental homes available. There were simply no apples-to-apples comparisons between renting and owning.
That, however, did not make buying the only choice. Even an apples-to-broccoli comparison is meaningful, within limits. If I had learned that the few rental options lacked some features that I might desire (large yards, for example), then I could decide how much more I was willing to pay (net of everything, including tax breaks) for those features.
Here is where the story became more interesting, under the particular facts that I faced. The net cost of owning a 4-bedroom, 3-bath house, on a relatively large lot, within easy access of the DC Metro, was actually less than the cost of renting a 2-bedroom, 1-bath apartment in the same town. I saved money, on a monthly basis, by buying a bigger place. Did not see that coming.
Of course, that is not the whole story. My financial portfolio is now heavily tilted toward one big asset. I could lose big, depending upon when I sell. There could be a toxic waste leak in the next town, which could make my neighborhood uninhabitable. Bad things do happen. For a tenured, middle-aged guy who loves his job and his location, however, these risks are about as small as they can be.
I continue to believe that public policy -- and popular mythology -- should not push people into home ownership. I also know, however, that home ownership under the current rules makes sense for many people. (Marriage also makes sense for many people -- but not for everyone.) Yes, my financial well-being is now somewhat more tightly bound with policies that I personally oppose. That, however, is true of many policies. For example, under my ideal income tax system, people like me would pay more than we do today. There is no hypocrisy there.
In the main, one makes choices not on the basis of what the rules should be, but as they are. The average law school graduate should not feel pressured to buy a home. No one should. For many people, however, it will make sense to buy rather than rent. If I ever need to sell, I will be happy that such people exist.