The Cult of Homeownership
In The Economist, Will Wilkinson, a Missourian by birth, recently argued that the financial crisis was caused by the government’s attempt to reduce wealth inequality through homeownership (bolded emphasis mine):
If you ask me, the ultimate culprit in the financial crisis was the American cult of homeownership. There are many ways to help poorer Americans accumulate wealth, such as channeling payroll taxes into personal retirement accounts. But we don’t do that. Instead, because we consider it a humiliating indignity not to have a room or ten of our own, we subsidise home-buying six ways to Sunday and tell banks they won’t have to suffer the downside of loans offered to bad credit risks. I think it’s safe to say that this hasn’t turned out to be the best scheme for helping poorer Americans into the ownership class.
This commentary is consistent with my previous discussion of the negative policy implications of encouraging homeownership in Missouri, such as promoting inflated housing prices.
Unfortunately, the emphasis on homeownership persists in Missouri public policy. There have been recent calls from politicians in Missouri to make the federal homeowner tax credit permanent. From the Think Progress blog (hat tip to Audrey Spalding):
[T]he home buyer’s tax credit was enacted as part of the stimulus and then extended a couple of times, and by all accounts it was a complete and total boondoggle, costing taxpayers billions to subsidize activity that was going to happen anyway. Even the credit’s staunchest supporters have said that its “sunsetting is an incentive to drive people to the marketplace” and poo-pooed the notion of extending it forever, which clearly turns it into a permanent subsidy to the real estate industry.
Additionally, just as the government shouldn’t favor certain businesses and industries over others, the role of government should not be to favor or subsidize one lifestyle over another — like homeownership over renting, or rural lifestyles over urban ones. Despite its infinite wisdom, the government does not know the mix of goods and services that an individual or family should consume in order to maximize their level of utility. Missourians would be better off if the government stayed out of the housing market entirely.
Moss argued that people could have afforded their mortgages if there wasn’t such a large income gap. But the fact is that people in the first decile wouldn’t have had mortgages in the first place if it weren’t for Wall Street. Really, most homeownership promotion programs were probably designed for the 2nd decile on up. He admits that executives took risks that were dangerous to the wider economy — they created a huge demand for debt that could be bought, sold, traded, insured, etc (a market initially created by Fannie and Freddie). This was delivered to them by extending products based on those programs down to that first decile (and everyone else). So is the problem the programs or is it their abuse? It seems likely to me that it is probably both.
So yeah, both those guys are wrong.
Also, if the $8,000 credit was designed to work off excess inventory (it was) then extending it indefinitely makes absolutely no sense.
Comment by Rob — August 31, 2010 @ 7:36 a.m.
I completely agree with your assessment. Please allow me to share my story:
My wife and I are young, married, and have been more or less forced into renting by our financial situation. We were disappointed that we could not take advantage of the tax credits for first-time homebuyers.
Having the opportunity to live a “renter’s lifestyle,” however, I do realize now the problems of encouraging homeownership. Take as a counter example our good friends who, also young and married, bought a house to move into the day after their wedding. They were encouraged by the prevailing cultural preference for homeownership, sympathetic and generous parents, and an $8000 first-time homebuyers tax credit.
But now, they owe more on the house than it’s worth, cannot refinance, and live in a depressed, newly built neighborhood where lots are still available for sale. They now have a child, and my friend is concerned he could lose his job soon. If that is the case, he will likely be unable to sell his home and move to wherever he needs to for a job, unless of course he wants to take on a second mortgage and a substantial monthly rent.
My wife and I, on the other hand, have moved three times in the past two years, following school and jobs. We both have promising careers and are prepared to move whenever the timing is right. We live close to public transportation and have managed to be a one-car family.
Of course, there are the macroeconomic policy reasons why encouraging home-ownership is bad, but, as my example works to illustrate, even well-meaning people, looking to make a decent investment in the long-term, might be caught off guard by the short-term pitfalls. The willingness of the government to put people in homes seems to speak to an ignorance of such “microeconomic” difficulties.
Comment by Daniel A — August 31, 2010 @ 12:53 p.m.
Thanks for sharing! Your story reminds me of a story that I recently heard on NPR on the advantages of renting over owning:
http://www.npr.org/templates/story/story.php?storyId=129331482
As an additional advantage, renters don’t have to make unanticipated expenditures when something breaks on the house. I have a friend who owns a home with her husband and they are experiencing problems with their roof. She says that it will cost close to $2000 simply to diagnose the problem.
Comment by Christine Harbin — August 31, 2010 @ 1:10 p.m.