The Questionable Practice of Subsidizing Homeownership

The Richmond Fed, of all institutions, recently published an article critical of the subsidization of homeownership. Some takeaways:

• Government attempts to boost homeownership, dating from Clinton's "National Homeownership Strategy," resulted in the loosening of lending standards that led to the financial meltdown.
• The tax deduction for mortgage interest encourages people to buy bigger and more expensive homes.
• An assortment of government subsidies steer more investment capital to the housing market than would otherwise occur. This has resulted in an overinvestment in housing relative to other capital goods.
• It is not clear that using one's home as one's primary investment is a sound financial decision. The opportunity costs of other investment choices are generally not taken into account.
• Homeownership reduces labor mobility.
• Because of the interest homeowners have in keeping the property values high, they have a bias toward land-use regulations. These restrict the number of houses that can be built in a given area, keeping inventory low and values artificially high.
• Notable quote from Nobel-prize-winning economist Edmund Phelps: "It used to be that the business of America was business. Now the business of America is homeownership."

These observations support the argument that suburbanization has been a terrible misallocation of resources.

Rents and Mortgage Payments

I've found a fellow traveler when it comes to my skepticism at the unquestioned good of home ownership. Felix Salmon, whom I've already quoted here, argues here that mortgage payments should be less than rents.

It is not the job of government to prop up house prices to the point at which mortgages cost more than prevailing rents. In fact, right now, it is entirely rational that a new mortgage should cost less than prevailing rents. Here's a few reasons why:

1. Mortgage rates are extremely low -- which means that when you come to sell the house, they'll probably be higher. Since resale value is an enormous part of the price you're willing to pay for the house, this is a very important consideration.
2. Cash is king, right now -- everybody wants liquidity. To get a mortgage, you need to make a downpayment, in cash. The opportunity cost of that downpayment has never been higher.
3. House prices rose for over a decade; they've been falling for a couple of years. It's entirely reasonable to expect them to continue to fall, whatever happens to rents, for many years yet.
4. A house, right now, is a liability, not an asset. It ties you down to one place, which makes it harder to get a good job if you become unemployed. It needs constant maintenance, it comes with obligations to pay property taxes and insurance, and, if you do end up renting it out, there's all the inevitable hassles with the renters. Without much if any expectation of house-price appreciation, why go there?

More and More People Are Sounding Like James Howard Kunstler

Matthew Yglesias calls this "the misallocation of resources," echoing the very phrase that Kunstler has been using for years to describe the tragedy of the suburban building boom.

We imported tons and tons of capital over the course of the last expansion. But an awful lot of that capital didn’t wind up going to stuff that enhances our ability to produce goods and services in the future. Instead, at best it went to making it the case that people live in somewhat larger homes than they used to, and at worst it went to building homes that nobody wants to live in. This is a bigger deal than lost notional wealth—it’s a lost opportunity.

Housing Is Not So Hot In France, Either

A chart from Le Monde showing the sales of existing homes (blue line) and new homes (red line).

The Risks of Homeownership

Today's NY Times has a long article that links the collapse of the financial system to the Bush administration's vision of an "ownership society."

If you can fog a mirror, you've had it drilled into your brain that the American Dream depends on home ownership and that to achieve financial security and community respectability, you must carry as big a mortgage as you can muster and spend your weekends tinkering and puttering to enhance your "investment." These are articles of faith that are largely unquestioned, making it easy for the country to stifle a yawn and politely applaud when W made pitches that "stoked the mortgage bonfire:"



Let's just say that I was always skeptical of the unqualified benefit of owning a home, especially during the dreary period when I was a homeowner myself (as my own contribution to the literature on this subject attests). Every now and then, I run across the reports of others (both scholarly and anecdotal) that confirm my conviction. An example is this one, from a researcher at The Wharton School of Business, which doesn't address the financial aspects, but the psychological aspects of owning a home:

An interesting portrait of homeowners emerges from my analysis. I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower a lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people. Contrary to popular belief, I do not find significant differences in family-related time use patterns, family-related affect, number of normal work hours, indicators of stress or measures of self-esteem and perceived control of life by homeownership.

I am indebted to Mr. Felix Salmon for the link to this research and for his insightful comment that:

For this we make mortgage interest tax deductible, we create monsters like Fannie and Freddie, we run election campaigns promising everybody their own home, we equate homeownership with the American Dream?

It turns out that Mr. Salmon has long believed, as I do, that homeownership is overrated, both in terms of its financial benefit and in terms of its supposed role as the bedrock of social stability, as he elaborates here.

Yes, if things go well then a homeowner ends up with a magnificent and hugely valuable asset which he owns outright. But if things go badly – and you only need one round of layoffs, or a single medical emergency – then the same homeowner can end up in foreclosure and bankruptcy. Those risks are much more remote for renters without huge debts – and make no mistake, a mortgage is one enormous debt. If owning a home is nice, then losing it can be devastating.

[snip]

My point is that the kind of people who have stable and successful lives will have stable and successful lives whether or not they own their own homes. Naturally, a lot of them will indeed end up owning their homes, but it's not a necessary precondition. And if you wanted an example of a place where millions of people have successfully had stable and successful lives for decades, it would be hard to come up with a better country than Germany – which has extremely low levels of homeownership.

The Nuisance of Private Ownership

I became a homeowner in a fit of temporary insanity. One of my more prominent genes has consistently sent an unmistakable message to the boys at Central Nervous: Don’t buy. Rent. Somehow, some way, however, nurture tricked nature, the clarity of instinct blurred, and I foolishly signed away my money and leisure.

I’m not lazy. It’s just that ordering my days according to the strictures of household maintenance always seemed a perversion of priorities. I was right, of course. Like everyone in the muddling middle-class, I owe most my time to people I would rather not know and activities I would rather not do. But unlike many in my social milieu, I am loathe to fritter away my meager free time tinkering about my domicile. First, my craving for self-expression cannot be satisfied by a well-manicured lawn, or by the brand of faucet that spouts water on my head, or by a sprawling wooden wasp nest appended to the back of the house. Second, I have no talent for labor of the manual and dexterous sort. The ineptitude with which I wield a power drill, for example, would win me a starring role in a slapstick short. Despite careful measurements and penciled stenciled pilot holes, the screws inevitably penetrate off perpendicular. I then cuss a bright blue streak, hurl my tool, and punish my incompetence with a painful pound of the fist on something not meant for fist to pound against. Finally, my father was a spy, not a carpenter or mechanic, and despite his latent flowering as Mr. Fix-it, let me pass my youth chasing balls and girls and failed to instruct me in the handy arts. Thank God.

Although I’ll admit to some strategic miscalculations of life course, I’m far from stupid and present my engineering degree as evidence of an ascetic stubbornness to earn stage credit even when hopelessly miscast. But neither my highfalutin schooling nor my long association with techies and trekkies gave any osmotic boost to my feeble domestic intuition. I still sadly lack the hands-on how-to most folks seem to develop naturally. I am always amazed that people puzzled by algebra can correctly calculate the amount of drywall needed for a half-bath or that good souls blissfully ignorant of the mathematics of fluid flow can diagnose plumbing problems with knowledgeable references to drains and traps and valves and seals. My eyes, in sad contrast, glaze over quickly when trying to figure out the working and wiring of a three-way switch, a problem I never confronted on all the electrical engineering exams I aced.

The structure I bought and euphemistically call home has what realtors, neighbors, and members of the Bob Vila cult call “character.” To these silly and dangerous fools, “character” means Victorian nooks and crannies, turn-of-the-century curlicues, and lots and lots of oak. Character really means gaping fissures swallowing disintegrating plaster. It means paint and varnish on the precious oak resistant to blistering heat and chemicals that could dissolve diamonds. It means hidden, waterlogged two-by-fours nesting insects whose swarming numbers easily outmatch the beer-bellied goof sent by Terminix. Character means an ancient toilet one dares not flush with the lid open for fear of sucking toiletries, knick-knacks, and domestic animals into the stinking entrails of the Chicago sewer system. It means porous pipes in the upstairs bath that seep and form plaster stalactites on the dining room ceiling, creating a homey ambience for the troglodytes and spelunkers among our dinner guests. Don’t give me the song and dance about character.

Allow me to take you on a brief literary tour of my home. To quote a cliché of the smiling faces gracing the paper placemats at the nearby pancake house, it has location, location, location – at least with respect to transportation, transportation, transportation. The Kennedy expressway meets with the Edens at a stone’s throw from my back windows, from which, by the way, I can verify the accuracy of the rush hour traffic report. A steady whispered roar is the audible sum of the Dopplered traffic rushing past, with the occasional throaty downshift of an angry truck providing bass counterpoint. The clattering El splits eardrums as it splits eastbound and westbound lanes of the Kennedy. And the double-deckered majesty of the Metra train whistles and dings not fifty yards from my back door. E-Z on, E-Z off, but a din of urban white noise perhaps disturbing to light sleepers.

Our house is fourth from the north on the east side of Keystone, a street segmented into a short autonomous stretch from the Metra line to the north to a run of homes on Grace to the south. It faces a fenced schoolyard landscaped with weedy grass and blotches of ancient asphalt and shadowed by a large, drab, red brick school. Like the other houses in the neighborhood and throughout the city, ours has a brief front yard belted by a sidewalk luckily in better repair than some. The front porch might wrap around if it could, but the narrow gangways spacing the neighboring homes truncate it to the width of the house. This is fortunate, since the porch’s border of wrought iron seahorses and licorice sticks took me four months to prime and paint last summer as it is.

Our home is sided in grayish blue vinyl, which, for some curious reason probably part of the pitch of the guy who sold it, has swirls of simulated wood grain. The fatness of the siding suggests the dowdy peasantry of the neighborhood’s Central European ancestry; homes more recently sheathed by yuppie newcomers have thin and elegant strips, even if they still suffer from shadings too muted and putrid or too childishly bold. I’ve always been partial to the earthy dignity of brick and stone and have never liked the motley hodgepodge of off-the-rack frame house fashions. I’m sure some bright social scientist somewhere earned his doctorate explaining why Americans wrap their homes in colored plastic.

Entry into my house is gained through a front door of handsome oak rather precariously framing a large pane of plate glass. The fact a competent burglar could pop that glass in a jiffy makes a good argument for one of those impact-resistant screen doors – the kind that seal tightly with a loud pneumatic sigh and lock with crowbar-proof deadbolt. Extra aesthetic bonus points would accrue with the trashing of the flimsy, drafty, gingerbready door that currently ushers in cold air and insects with indiscriminate hospitality.

The highlights of the house are evident from the foyer. Spice brown hardwood floors cover most of the first level. The slightly more reddish banister jutting from the north wall partially hides the strong staircase that makes one abrupt right turn and a second through a fan of several steps, eventually orienting its climber 180 degrees from his starting attitude. More richly hued oak frames a north window and forms a decorative, possibly even functional, ceiling beam. So much for the highlights.

Actually, I do like the wall colors chosen by my wife and painted by a drunken Greek and his drunken mutt of a sidekick after they kalexed or katexed or some such thing to shore up the plaster. The living room is my favorite, a bold and sunny yellow that offsets the dark floors very nicely indeed. A subtle lavender (adjective useless in its redundancy) coats the foyer, the stairwell, and eventually the upstairs hallway. A fortunate play of shadows hides the splotches of old wallpaper adhesive the drunks failed to remove before painting. The dining room is two-toned. Its peach interior wall has gradually become dekalexed or texed (the trains cause the cracks, say our sympathetic neighbors) and both the peach and the pale green on the other three walls are chipped and smudged at kid level.

I attest that the moldings and baseboards of the living and dining rooms really do amount to lots and lots of oak. I became intimately acquainted with their every blessed square inch during a hellish month of stripping and sanding. The result, kindly stated, is rustic. The next sap that owns this dump can finish the job.

You have the feel for the downslope of our home’s features as you approach the rear of the house. On entering the kitchen, you sense the plummeting terror of free fall. No more time for languorous descriptions – I must rush you through the tour in mumbled embarrassment.

Kitchen: Floor the color of smoker’s teeth. Walls covered with a Formica/linoleum compound from the laboratories of the fifties. Ample cabinets. Drop ceiling hiding unspeakable horrors. Leaking faucet, drain pipe with PVC union formerly held in place by my own time-sensitive magic spell, now more professionally secured. Rotted wood below the drain pipe proof that the previous owner’s magic was no more enduring.

Half-bath: After the paint stripping nightmare, my second-biggest restoration project. Newly insulated and drywalled with the bubbles and ridges of a rank amateur. Pressed wood sub-floor promoted de facto to full floor. Spanking new double-hung. Sleek, racy, low-profiled toilet whose government-mandated 1.6 gallon flush barely beats a chamber pot.

Wreck room: Hideous dark paneling and frilly, doily, water-stained curtains (the water courtesy of a tree-scraped gash in the roof that also soaked the insulation and probably gave birth to our carpenter ants). Toys and food crumbs strewn entropically. Gurgling water cooler. Drafty door. New sliding windows giving an uninhibited view of the rotting garage. Possessive of a mysterious gravitational attraction that pulls in both guests and residents.

You may have heard enough. But I insist on diverting your imagination upstairs (I haven’t the Inquisitional heart to torture you in the basement dungeon). Resist shrieking at the tentacles protruding from the wall and groping for your face – they are only Edison-era wires grasping for the missing wall sconce. Glance in the master bedroom and breathe with relief – it’s large and charming with handsome maple floors and bay windows. You’ll find the other bedrooms more or less inhabitable as well and you may even find clever our use of one dinky little room as a walk-in closet. But if you peer into the bathroom, the illusion of respectability will be shattered.

Let’s end the tour before I start plaintively moaning about the financial aspects of my residence. Suffice it to say that any repair costing less than a grand either doesn’t last or looks bad and anything more than a grand means I got screwed. The famous mortgage interest deduction is more than offset by such unforeseen foibles as a failed furnace in a mid-December freeze or a fund-sucking attempt to fortify the fenestration.

Fly on, unencumbered spirits! Keep your rented studios, your two-bedroom flats. Boomerang back to your parents, if necessary, or be not too proud to lodge in the alcoholic warmth of a decent flop house. Take on spouses and kids and pets and jobs with mind-crushing demands. But until you’re ready to bed yourself in the mossy fungus of the sedentary life, avoid the jungle of homeownership.