Maybe we should stop trying to be a nation of homeowners
IN THE SOUL-SEARCHING sparked by the financial meltdown, Americans have started to look askance at some of the habits and policies that had come to define our country. Excessive consumption and living on credit are no longer seen as acceptable, let alone possible. "Deregulation" is suddenly a dirty word.
Yet despite the housing crisis, one value, more deeply entrenched, remains sacrosanct: homeownership. Irresponsible mortgages have been universally condemned, but it is still widely assumed that we all aspire to own homes - and that we all should aspire to own homes. Homeowners are thought to be more engaged in their communities and to take better care of their houses and neighborhoods. On a nearly subconscious level, buying a home is a central part of the American dream. A picket fence may now be dispensable, but a house of one's own is seen as the proper place to raise an American family - a prerequisite for stability, security, and adult life. And for decades - but increasingly under the Clinton and Bush administrations - federal policies have encouraged citizens to achieve this goal.
But a growing chorus of economists and housing experts say that this mind-set, too, needs fundamental reform. Owning a home is not right for everyone, they say: In some ways it's overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be. Widespread homeownership may also have a negative impact on the economy, because, among other reasons, displaced workers can't easily relocate to new jobs. And some of the alleged rewards of homeownership, such as greater self-esteem, health, and civic engagement, have been called into question by research. The government, critics argue, should focus on ensuring high-quality, affordable housing rather than promoting homeownership for its own sake.
"There's no reason we should all be homeowners," says Joseph Gyourko, a professor at the Wharton School of Business and coauthor of "Rethinking Federal Housing Policy." "Homeownership has a lot of benefits, but it has costs, too."
According to this view, renting offers many advantages, and should be considered a viable long-term option for people of all ages and socioeconomic levels. Renters enjoy flexibility and freedom from the responsibilities of maintenance. Given the often overlooked costs and risks of homeownership, renting is in many cases a wise financial choice. And the experience of a place like Switzerland - a well-functioning country with only about a 35 percent homeownership rate - suggests that rental housing per se does not unmoor society.
Some analysts propose abolishing or limiting the mortgage interest tax deduction, which provides substantial tax breaks for homeowners. Others favor greater security for renters - such as laws making eviction more difficult - or tax deductions for renters, which a few states, such as Massachusetts, already offer. The MacArthur Foundation has launched a major initiative to preserve affordable rental housing in 12 states, including Massachusetts. In the recent stimulus legislation, advocates of renting successfully fought additional incentives for homeownership, and they continue to push for a "balanced" housing policy.
Certainly, homeownership still has staunch defenders. Many stand by its psychological and social benefits, and consider a home to be a sound investment. "It's the single most significant source of wealth and most secure source of savings" for Americans, says Jim Carr, chief operating officer for the National Community Reinvestment Coalition. In his view, the real problem has been the dysfunctional market, which we should not conflate with homeownership itself. "In a well-regulated market, homeownership provides a nest egg and an important generational wealth transfer," he says.
Nearly everyone agrees that homeownership is sometimes the right choice: for people with the means, who intend to stay put for a long time and want to customize their houses, it probably makes sense. And the mortgage interest deduction would be difficult to eliminate for political reasons. Yet more and more experts are saying that if we could unsentimentally see the pluses and minuses of each option - and if we had a level playing field in terms of government support - the sensible decision for many Americans would be to refrain from buying a home, perhaps for their whole lives.
Owning a house, we tend to think, is a quasi-magical boon that provides a broad array of goods for individuals and families. There is a logic to the reasoning: If you are financially invested in a neighborhood and expect to stay there for years, you'll be more inclined to tend a garden, bake muffins for your neighbors, and follow developments that affect the community. You have more control over your environment, which seems likely to yield psychological benefits. Studies over the years have suggested that homeowners are healthier and happier, and even that their children perform better in school.
But other research has challenged these conclusions. Some studies find no significant relationships between these desirable outcomes and homeownership. And according to several reviews of the literature, many of the studies suffer from methodological flaws: Most importantly, they fail to control adequately for other variables, such as income, age, marital status, and home value. In other words, homeowners tend to do better on a range of measures, but that doesn't mean that the ownership status is the cause; homeowners tend to be older and wealthier, which could account for the differences. And there is little research on the potential negative consequences for low-income families facing the burden of mortgage debt and the possibility (and reality) of foreclosure.
A recent study, which aimed to avoid the problems of previous research, suggests that homeownership confers no real benefits. The study examined self-respect, perceived notions of control, time spent with friends and family, volunteer activities, and enjoyment of the neighborhood, among other things. On all of these measures, after controlling for income, health status, and home value, the study found no significant advantage for homeowners. In fact, homeowners were on average 12 pounds heavier, and they spent less time with friends. They also reported more "pain" - the term used in the study's survey - deriving from their homes than renters. Grace Wong Bucchianeri, an assistant professor at the Wharton School, conducted the study in 2005, at the top of the market. (All of her subjects occupied single-family homes, so the only difference was ownership status. But her study had limitations too: all of the subjects were women, and it was geographically confined to Ohio.)
"It challenges our notion of engaged, active, healthy homeowners," says Bucchianeri. "We're not looking at a lot of benefit here."
Some of the more concrete financial drawbacks of homeownership should be obvious to any homeowner. There are high transaction costs: 7 to 10 percent of the cost of the house goes to the process of buying and selling. Between "sprucing it up and legal fees, it's not cheap," says Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard. Major repairs, sometimes unexpected, may be needed, and simple upkeep usually costs 2 to 4 percent of the house price per year. These responsibilities can be a hassle as well as an expense. Renting, by contrast, is "inherently efficient," as Matthew Perrenod of the Housing Partnership Network argued at a housing conference at Harvard in mid-March, because the maintenance can be professionalized. Owning also, of course, comes with the risk of losing money if you have to move during a down market, or of being tethered to a house you want to leave.
Renting is often derided, especially by real estate agents, as "throwing money away." But upon close examination, the best financial decision is far from clear, and it's impossible to generalize. Buying entails paying property taxes, as well as the cost of repairs, mortgage payments, and mortgage interest.
Some financial analysts say that in terms of dividends, individuals would often be better off renting and using the money saved to invest in stocks. According to the National Multi-Housing Council's 2008 annual report, a $100 investment in a home in 1985 would have paid off $210 by 2008, but if the same amount had been invested in stocks, it would have grown to $710. (Of course, the recent drop in stock values likely narrowed the gap.)
Some of the advantages of homeownership may be double-edged. Stability has virtues, but the flip side is inflexibility. Especially for low-income homeowners, owning a home can become a trap, preventing them from escaping distressed neighborhoods. For people at all income levels, owning a home may keep them from moving to where jobs are.
In the mid-1990s, Andrew Oswald, a British economist at the University of Warwick, began to notice a correlation between national rates of homeownership and unemployment. Among industrialized nations, Spain had the highest rates of both, while Switzerland had the lowest rates of both. Other variables, such as the generosity of the welfare state, didn't seem to matter nearly as much. He believes a high homeownership rate undercuts the efficiency of the economy: not only does it contribute to joblessness, but workers may take jobs for which they are not ideally suited, based on location rather than skills.
"There's been a presumption that it's really good for a country to have a high rate of homeownership," says Oswald. "But that homeownership equates with inflexibility."
The evidence is mixed on whether homeowners are more civically engaged than renters. But to the extent that they are, their influence in some cases has undesirable societal repercussions. Since houses are the major asset for so many families, homeowners naturally want to protect their property values. This often leads to zoning laws that make it difficult to construct commercial or additional residential buildings. Such laws erect barriers to entrepreneurs and reduce overall housing affordability.
Moreover, homeowners are likely to have longer commutes than renters, as New York Times columnist Paul Krugman has pointed out. That's because they buy houses on inexpensive land, farther from city centers; this contributes to sprawl and congestion. As awareness has grown about climate change, more and more analysts are citing environmental factors as a reason to prefer renting and the relative density that typically goes along with it.
Given the mixed evidence for the benefits of homeownership for both individuals and society, does it warrant major government promotion?
The mortgage interest deduction has aroused widespread criticism. According to many detractors, this tax break does not even foster homeownership; it merely encourages the affluent to buy bigger houses. "When they go to deduct interest, it has a more powerful effect for them," says Belsky. "They're buying more house." For this, the government forgoes large amounts of tax revenue. President Obama's budget proposes reducing the deduction for the top tax bracket, although this provision may be difficult to pass.
Some believe any subsidy for homeownership is misguided, given the uncertain evidence for its benefits, and the indications of downsides. Low-income people may be seen as most deserving of support in buying homes, but in some ways they also stand to lose the most, as has become clear in the recent crisis. People without stable jobs or family situations may find it difficult to meet the responsibilities of homeownership, and efforts to help them buy homes could backfire by ending in foreclosures.
A number of proposals have been advanced by critics of the status quo. Dean Baker, codirector of the Center for Economic and Policy Research, advocates greater protection for renters, so that they are ensured certain standards of quality and "some security," he says, "so that your landlord can't just say 'I want you out.' . . . Renters shouldn't be second-class citizens." (A few cities, such as New York, already offer some strong protections.) The National Multi-Housing Council advocates incentives for rental housing. In the housing stimulus bill passed last July, it successfully lobbied for increased funding for the Low-Income Housing Tax Credit program, which supports the production of affordable rental housing.
Some economists, such as Gyourko, don't believe in subsidies for either alternative.
"I think we should have a level playing field," he says. "There's no reason to subsidize homeownership significantly."
The emotional tug of owning a home can't be discounted. But in recent years, as jobs have become less stable, environmental concerns have risen, and the costs of owning a house have become apparent, the case for renting has become more compelling. According to Eric Belsky, "People are saying, 'Hey, it's OK to rent.' " Instead of starting with a presumption in favor of homeownership, he asks, "Why don't we help people make informed choices?"
Rebecca Tuhus-Dubrow is a contributing writer for Ideas. She can be reached at email@example.com.