Thursday, May 03, 2012

Professor Buchanan Rejoins the Propertied Class

-- 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.


Josh Sturtevant said...

Congratulations are in order! Or at least I think they are...

I always appreciated your logic on this topic. However I enjoy it even more that you are as good at challenging economic assumptions as you take the time to train your students to be.

Best of luck with the new home. I will appreciate any updates to your analysis of 'cheapness' once you have to account for rapidly growing lawns and towering leaf piles as an owner rather than renter!


Patrick S. O'Donnell said...

[in two parts, owing to length]

I may have said this before (I can’t recall...and yes, it probably is an ‘age thing’), but in our case home ownership was a necessity owing to escalating rents and the insecurities posed by renting (with two small children, it’s hard to change school districts, etc.). However, we could not afford to purchase a home and were rather desperate, considering moving out of my wife’s hometown (for several generations) and my adopted town (over 25 years at that time). But we qualified for a low- to moderate-income (in the former category) housing program which involved sweat equity, in other words, largely physical labor commitments so as to earn “credits,” although my wife also volunteered in the office of the non-profit housing group that worked with the city to develop its latest project of seven condominiums: three refurbished, two new. Although the “homes” were priced below market value and involved income restrictions, the banks did not make any exceptions with regard to loan qualification, so very few people could actually make the list of qualified applicants (a big disappointment to those who earned volunteer points, only to later learn lenders would have nothing to do with them). In our case, we had to get a credit card and go into debt by way of demonstrating our “credit worthiness” (heretofore, we paid for everything up front, and had no debt, save for school loans). I was in my 40s when we finally purchased one of the condos, which had strict re-sale conditions (so as to prevent owners from using their ownership to ‘make money’), assuring our residency here, ceteris paribus, well into old age.

Our mortgage payments are well below what we would be paying in rent today for something far smaller, older, and probably in poor condition. And it’s nice to know we can work on the grounds and our place and not see a landlord exploit that work so as to enhance the value of the property for “himself.”

Patrick S. O'Donnell said...

[second part of comment]

There are not a few problems in our neighborhood, largely gang- and drug-related, but we’re willing to bite the bullet so as to have relative security of homeownership (as a Buddhist, I’m continually reminded of the notion of ‘impermanence’ and the value on ‘non-attachment,’ so the ‘ownership’ and ‘security’ stuff comes with a big chunk of rock salt). I feel for the folks who were (and are) in positions the same or similar to ours and must keep renting, perhaps even move far out of the area so as to find affordable rental housing (yes, I realize that for some, ‘shelter’ is the principal need and concern). The speculative aspect of home ownership will remain as long as we keep our blinkered faith in capitalist economics* and thus housing will always contribute to or exacerbate conditions of social inequality and injustice. It’s utterly irrational.... So while I agree with Neil that we are inordinately focused on and tied to the unreal value of home ownership in this country, but it’s the terms of conditions of housing that frequently make ownership far preferable to renting, especially for those with families (used in the widest sense).

* I should note that we might take some “inspiration from the fact that Red Vienna’s housing program was implemented and ‘worked’ for a brief period in a basically capitalist society,” albeit one with a social democratic municipal government (an island of socialism I suppose). The social democrats of Red Vienna “launched an all-out attack on inadequate and unaffordable housing. The approach included many of the components advocated by progressives today: rent control, city-supported cooperatives and self-help initiatives, land banking, and new construction programs. But beyond the quantifiable achievements of Red Vienna’s policies was a fundamental concern for fairness and equity in the allocation of housing services.” See Peter Marcuse, “A Useful Installment of Socialist Work: Housing in Red Vienna in the 1920s,” in a (still) wonderful volume edited by R.G. Bratt, C. Hartman, and A. Meyerson, Critical Perspectives on Housing (Philadelphia, PA: Temple University Press, 1986). Two other books I’ve found helpful (perhaps because they’re not too technical or conventionally ‘economistic’) are John I. Gilderbloom and Richard P. Appelbaum, Rethinking Rental Housing (Philadelphia, PA: Temple University Press, 1988), and, John R. Logan and Harvey L. Molotch, Urban Fortunes: The Political Economy of Place (Berkeley, CA: University of California Press, 1987). I’m sure Neil and a few of our readers can help us with some more recent and related titles!

Patrick S. O'Donnell said...

erratum (second para.): "So while I agree with Neil that we are inordinately focused on and tied to the unreal value of home ownership in this country, it’s the terms and conditions of the housing market (as Neil also appreciates!) that frequently make ownership far preferable to renting, especially for those of us with families (used in the widest sense).

Neil H. Buchanan said...

My thanks to Josh and Patrick for your comments and further reflections. It's good to know (in Josh's case) that my former students are still reading my pearls of wisdom!

Both commenters highlight important factors that can complicate and change the computation of relative cost. I am already planning a post for later this month, in which I will add these insights to the analysis.

Thanks again.

Ryan Danks said...

Congrats Neil. I made the same decision about six months ago, and am still trying to figure out whether I properly accounted for "cleaning the gutters" or not.