The enduring dream of homeownership
WORCESTER, Mass.–Emily Perlow is a 30-year-old single woman who radiates confidence when talking about her job as director of student activities at a local university. But when talking about the subject that occupies her mind these days, the prospect of becoming a homeowner, she is admittedly terrified. Her fears run the gamut, from the risks of assuming a substantial mortgage–”It is certainly cheaper for me to rent,” she acknowledged in a recent chat over coffee–to uncertainty about whether she’d ever be able to sell her property for a profit.
And yet, she’s on a relentless quest to escape her rented apartment by purchasing a detached, single-family home with more living space than she actually needs. “Honestly, I think it is a status mark,” Perlow said. “If you meet someone who is a homeowner, you think, ‘They’re stable, they have a good job, and they’re responsible.’ As a single woman, when I meet a man, and he owns his own home, I view that as an attractive quality. I’m 30. It’s about time to start my life.” And with that pert thought, she turned wistful. “I just want it to be mine,” she said of the home that she is scared–but not too scared–to buy.
For many if not most Americans, the dream of homeownership abides. The meltdown of the nation’s housing markets dating to 2007 touched off the nation’s worst economic downturn since the Great Depression. Still, a survey last year by government housing-finance giant Fannie Mae found that 80 percent of Americans–including 77 percent of renters–believe that a high rate of homeownership is important to the economy.
The ripe question, though, is whether homeownership should be viewed as a holy grail. Not only the citizenry but Washington has treated homeownership as a universal ideal. Any mortgage that Perlow would obtain is apt to be backed by the federal government, which currently supports 92 percent of all newly issued home loans. The government has long used its vast powers to promote an ever-rising rate of homeownership: “The higher, the better” was the credo of Democrats and Republicans alike, aiming to give people a tangible stake in their communities. The modern apostle of homeownership’s blessings was a Republican, Herbert Hoover, who adopted the cause as Warren Harding’s Commerce secretary in 1921-23. “For it is mainly through the hope of enjoying the ownership of a home that the latent energy of any citizenry is called forth,” Hoover proclaimed.
As the Great Depression receded, the homeownership rate did increase, from 44 percent in 1940 to a peak of 69.2 percent in mid-2004. The recent housing crash and the wave of foreclosures that followed lowered the rate to 66.5 percent in the fourth quarter of 2010, according to Census Bureau figures, and market forces may yet shrink it further. Is that OK, perhaps even healthy? Is it high time for the nation to jettison the goal of homeownership for all American households that President Clinton embraced in the 1990s? If so, should renters receive more assistance?
As the Obama administration and Congress try to map a post-bubble future for housing policy, a lot rides on the answers to these questions. In a nation of 112 million households, now split between 75 million homeowners and 37 million renters, adding 1 percentage point to the ownership rate translates to another 1.12 million dwellings. Homeownership supports a vast economic sector that includes real-estate agents, mortgage bankers, construction firms, and remodelers. Yet, the government’s efforts to promote homeownership cost the U.S. Treasury billions of dollars and leave taxpayers on the hook for many billions more.
In cultural terms, a shift away from homeownership as a civic ideal would be viewed in some quarters as positively un-American. Owning a plot of one’s own has defined this nation since Thomas Jefferson’s beloved yeomanry and the gifts of 40 acres and a mule to freed slaves after the Civil War. This departure would mark, at the very least, a transformation in the meaning of the American Dream.
In recent decades, this storied dream has increasingly become a financial one. Buying a home is the biggest investment that most Americans will ever make. And until recently, it was a seemingly sound one: From 1997 to 2006, inflation-adjusted housing prices rose by a remarkable 85 percent. Why would anyone choose to rent if he or she could afford to own?
It was this logic that led so many renters–with the support of the government and the purveyors of subprime mortgages–to “buy” homes with little or no money down over the past decade. (The bank, of course, is the real owner when the buyer has no equity.) The renter was tossing money away, it was said, while the homeowner was gaining equity and accruing wealth.
But let’s sift through some of the oft-touted benefits of homeownership over renting. In truth, the advantages are less extensive than advertised. Owning a home entails significant costs: The average homeowner spends 2.5 to 3 percent of its value each year on maintenance and repairs, in addition to shouldering closing costs, mortgage payments, insurance, property taxes, and utility bills. Just as with renters, whose monthly payments might cover some of those costs, these are expenditures that bring no financial return.
Then there’s the homebuyer’s biggest expense of all: the down payment, the basis for any future growth in equity. Suppose you put $20,000 down as starter equity. That’s $20,000 that now cannot be devoted to any alternative investments–a financial opportunity forgone.
Just how much of a lost opportunity is it? The calculations of economist Joseph Gyourko, director of the Zell/Lurie Real Estate Center at the University of Pennsylvania’s Wharton School, should give pause to those who believe that owning is always better than renting. Gyourko found that the most recent spike in housing prices, which grew 4 percent a year faster than inflation, was an anomaly. The norm, as shown by data going back to 1975, is for home prices to appreciate by merely 1 percent per year. (Smaller bubbles in the late 1970s and the late 1980s were both followed by price dips.) In contrast, by Gyourko’s figuring, the basket of stocks making up the S&P 500 index have averaged an 8 percent annual increase since 1975, adjusted for inflation, and Moody’s index of corporate bonds rose 6 percent–even while Wall Street suffered a meltdown of its own.
“The financial gain from owning [a home] is likely to be modest,” Gyourko said. “There are lots better ways to accumulate the same amount of expected wealth that do not start off with [paying] a 6 percent fee to the broker.”
The costs of homeownership are high, and most of its benefits aren’t financial. Not the least of them is having a castle of your own, where you can do as you please. “That certainly is why I own,” Gyourko said, “not to get rich from it.”
Other benefits of homeownership are reputed to accrue to society as a whole. The mightiest claim in this respect–and it’s a biggie–is that homeownership contributes to what policy theorists call “social capital,” the binding ingredients of a healthy, prosperous, stable, and safe community.
Compared with renters, homeowners are more likely to vote in local elections, to attend church, to belong to civic organizations, and to garden–so found a 1999 study by the respected researchers Denise DiPasquale and Edward L. Glaeser, one that advocates of homeownership love to quote. But a deeper look shows that these differences in civic-mindedness are merely a matter of degree: The study found homeowners only 6 percent more likely “to work to solve local problems” and 12 percent more inclined to garden. They were also 10 percent more likely to own a gun–not necessarily a community good.
Comparisons across nations don’t suggest that homeownership carries an obvious civic advantage either. Germany, which has Western Europe’s second lowest rate of owner-occupied housing (43 percent), is by no means more socially unstable than Spain, with the region’s highest rate (85 percent)–or the United States, for that matter.
Within this country, homeownership rates also vary widely among cities–and here, too, the patterns don’t prove civic merit. Consider Detroit and New York City. Although famously unruly a few decades back, New York has since become a more civil place despite remaining primarily a city of renters. Detroit’s 55 percent rate of homeownership is far higher than New York’s 30 percent, yet its rate of property crime is 3.3 times higher, according to federal data. Buffalo, N.Y., has a homeownership rate of 44 percent, much higher than the Big Apple’s, but also a property-crime rate nearly equal to Detroit’s.
One factor that appears to matter more than homeownership in assuring civic health is employment. Jobs, or the lack of them, are the reason why the Motor City’s fate has waxed and waned with the fortunes of the auto industry. But in one respect, homeownership imposes a cost on the national economy that its advocates seldom note. Selling your home if you lose your job is considerably more cumbersome than shedding a lease, especially if a dive in the local economy drags housing prices down. That makes it harder for people in need of a job to move elsewhere to find one, thereby hindering an economic recovery.
“Renters are inherently more flexible,” said Andrew Oswald, an economist at Britain’s University of Warwick. “Economies need flexibility.” Having studied the relationship between homeownership and economic vitality in Western societies, Oswald pointed out, “Switzerland’s economy is arguably the most impressive in the world, yet the Swiss think of homeownership as something you do when you get close to retirement.” He considers high levels of homeownership “often a sign of faded ancient glories–of the prosperity of a previous generation who wanted to turn their dollars into bricks and mortar.”
Pricing the Dream
At Home Abroad
Many countries’ homeownership rates exceed that of the United States. Homeownership by country and year Singapore 2009 89% Spain 2008 85 Iceland 2005 83 Belgium 2007 78 Norway 2001 77 Portugal 2007 76 Ireland 2009 75 Luxembourg 2008 75 Chile 2002 73 Italy 2007 72 Israel 2004 71 Australia 2006 70 Canada 2006 68 England 2010 68 New Zealand 2001 68 Sweden 2008 68 United States 2009 67 Japan 2003 61 Czech Republic 207 59 Finland 2008 59 France 2007 57 Netherlands 2008 57 Austria 2009 56 Denmark 2009 54 Germany 2008 43 Switzerland 2000 35 Source: AEI, from national statistics bureaus and European Mortgage Federation
TABLE: At Home Abroad
If the government has long oversold the benefits of owning a home, how should Washington react now? Political conservatives–and some moderates–propose a hands-off approach. This tack of “Washington neutrality,” as it might be called, would have the government do nothing to encourage either homeownership or renting, instead letting consumers decide based purely on their preferences and financial means. “I don’t think it makes sense for the government to target a homeownership rate,” said Alex J. Pollock, a resident scholar at the conservative American Enterprise Institute and a former president of the Federal Home Loan Bank of Chicago.
As a policy ambition, kicking Washington’s influence out of the housing market is in the ascendancy these days. There’s a powerful argument to be made, after all, that the housing bubble might never have happened if the federal government hadn’t so zealously advocated the goal of homeownership for anyone and everyone. Still, it would represent a radical departure for a government that has unapologetically favored homeownership since Hoover’s “Better Homes in America” campaign of the early 1920s and Franklin Delano Roosevelt’s efforts to stimulate home-buying in the 1930s.
However, a truly neutral federal posture carries stern implications. If homeownership isn’t considered superior to renting, why should taxpayers be able to deduct their mortgage interest? The deduction, one of the largest tax breaks in the federal code, is expected to cost the Treasury $99 billion next year. But, according to the Urban Institute’s Tax Policy Center, it hasn’t even been proven that the tax break increases ownership rates all that much, because its beneficiaries are mainly suburbanites who would buy a home anyway–if a smaller or less-expensive one. Jettisoning the deduction would be politically daunting; still, former British Prime Minister Margaret Thatcher succeeded in phasing out a mortgage-interest tax break without losing her base of political support.
Washington neutrality would also mean waving good-bye to the generous exclusion from capital-gains taxes long extended to home sales. Why should profit on selling a home be taxed at a lower rate than stocks, bonds, gold, or any other investment? The lavish tax break enacted in 1997 to fulfill Clinton’s 1996 campaign pledge that middle-class families would “not ever” be taxed on a home sale, was widely blamed for encouraging rapid-sale “flipping” of properties bought purely for speculative gain. This contributed to the housing bubble that burst so ruinously.
A hands-off policy also would imply the end of Fannie Mae and Freddie Mac as twin pillars of the homeownership economy and also of federal efforts to promote homeownership for groups that have lagged behind. President George W. Bush focused on the “homeownership gap” between the 74 percent of white households that owned homes in 2002 and the 47 percent of both African-American and Hispanic households, by federal count. His administration blamed a lack of capital and poor credit as well as racial discrimination. The result was a 2003 law that authorized federal funds to help low-income and minority first-time homebuyers with down-payment and closing costs. But if owning is no better than renting, why bother?
Should Washington adopt neutrality between owning and renting as its new lodestar in housing policy, experts predict an upward pressure on mortgage-interest rates and a demand from private lenders for larger down payments; both steps would likely reduce the homeownership rate. At the same time, however, as advocates of neutrality note, fewer government breaks for buyers could tamp down housing prices; that, in turn, could expand the affordability of housing in a sustainable way, proving a boon for homeownership.
“Every subsidy you introduce, every favorable financing, every favorable tax treatment–all are processed by the operation of the market and get capitalized into the [home] price,” AEI’s Pollock explained. In that sense, the greatest beneficiaries of federal support for homeownership aren’t the buyers as much as the builders and the real-estate agents, for whom higher prices mean greater profits.
If homeownership is no longer regarded as sacrosanct, making Washington impartial isn’t the only possible response. Political liberals, inveterately suspicious of any assertion that the market always knows best, are cobbling together an alternative vision that would continue a prominent federal role in housing. A leading light in this effort is Rep. Barney Frank of Massachusetts, now the top Democrat on the House Financial Services Committee, who has been engaged in housing issues since his days as an aide to Boston Mayor Kevin White starting in the late 1960s. He foresees an active role for government not in promoting homeownership but in making it more affordable for people to rent.
“We put people in homes who couldn’t afford it,” Frank said in an interview, conceding that homeownership has been oversold. But he also argued that renting has been undersold. As a renter of apartments in Washington and Massachusetts himself, he decried “this status thing”–the notion that “if you’re a tenant, you’re less of a person.”
In Frank’s view, Washington should stop trying to help poor people buy homes and instead take a number of steps to make renting more affordable. Subsidies could be directed toward building rental housing by expanding community-development block grants to cities. Fannie Mae and Freddie Mac could increase their lending to developers of multifamily rental units. A federal commitment of no more than $10 billion annually, he figures, could significantly boost the renting option. A liberal economist, Dean Baker, codirector of the Center for Economic and Policy Research in Washington, suggested that money could be found by paring back the mortgage-interest tax deduction.
In the current political climate, though, cutting back on a popular tax break or budgeting more money to help poor people rent homes would be difficult to do. A less politically dicey approach might include dismantling nonfinancial barriers that hamper an expansion of renting. Many affordable rental units are mom-and-pop establishments, duplexes and three-deckers–the property of live-in landlords who must comply with parking ordinances and other rules decreed by local governments with a low regard for rentals. Many homeowners associations, to which 60 million Americans belong, either ban or severely restrict renting for fear of crime and rowdiness. To reorient the United States toward favoring renting over owning a home might require nothing less than a revolution in the approach to housing at all levels of government, from Washington on down.
The value of the federal mortgage-interest tax deduction accrues mostly to the wealthy.
Share of mortgage-interest deduction that taxpayers claimed, by income group, fiscal 2009 Total cost to federal government: $77.7 billion $200K and over 30% $100K to $200K 39 $75K to $100K 13 $50K to $75K 12 $40K to $50K 3 $30K to $40K 2 $20K to $30K 1 $10K to $20K 0.1 Source: Joint Committee on Taxation
TABLE: Upscale Deduction
Unless Washington either surmounts the political hurdles of undoing government support for homeownership or the fiscal obstacle of shifting its encouragement to renting, the status quo will endure. How well that would work isn’t clear. With the unemployment rate hovering near 9 percent and consumers still strapped for cash, and with mortgage rates rising and banks stiffening the terms of credit for loans, the U.S. homeownership rate may continue to sag. The historic high of nearly 70 percent just seven years ago could sink to 64 percent, Gyourko predicted–a level not seen since the mid-1990s. The Mortgage Bankers Association says that mortgage originations are on track to fall from $1.5 trillion in 2010 to a projected $966 billion this year, the lowest level since 1997.
But even a determined policy effort to make renting more appealing, should the government try that, is apt to encounter powerful demographic and cultural forces that will continue to take homeownership’s side. For one thing, aging baby boomers are entering the time of life when people are most apt to own a home. This is a natural, if not unalterable, generational progression: These days, U.S. homeownership rates range from a low of 39.2 percent for those age 35 and younger to a high of 80.6 percent for those 65 years and older, just slightly ahead of the 79.2 percent rate for 55- to 64-year-olds.
As for the longer run, as noted by George Masnick, a demographer who consults for Harvard’s Joint Center for Housing Studies, there is no evidence that single young women and men have retreated from seeing themselves as future homeowners, whether married or not. Some get help from a nongovernmental source. “A lot of buyers are getting gifts from their parents,” reported Brian Burke, a real-estate agent in South Windsor, Conn. He and others say that in a market suited for bargain hunting, first-time homebuyers remain as determined as ever to get their deals done.
Other trends, though less robust, are working in favor of renting. Immigration, for one, could surge as the economy recovers. Foreign-born dwellers currently make up about a fifth of all renters. The number of Hispanics who rent soared from 1.9 million in 1980 to 7 million in 2009.
But in the end, the future of homeownership will be determined, above all, by the whims and wishes and calculations, logical or not, of the millions of Americans who grapple with a subject that is overwhelmingly personal. Here in central Massachusetts–and presumably elsewhere, too–the notion that homeownership is overrated doesn’t play well.
“I’m throwing away $550 a month,” said Kate Egnaczak, a 28-year-old triathlete with a marketing job at an art museum, speaking of the rent she pays for her studio apartment. “I get no return on it. I have no investment.” So she’s scouring the market for a fixer-upper for under $100,000. Raised on a farm, Egnaczak has an idiosyncratic reason for wanting her own place: She plans to keep chickens to produce fresh eggs for breakfast. (Try asking your landlord for that!) Her parents have offered to help with the down payment; they took a hit to their retirement savings accounts in recent years and now view real estate as a better bet than the stock market.
Clearly, the ugly end to the housing boom hasn’t sated Americans’ appetite for owning a home. Indeed, it may wind up producing a more-settled class of homeowners, a throwback to the pre-boom days, before house-hopping became the norm.
In the bygone epoch of rapid price appreciation, Brigid McKenna, 30, and Dave Carlson, 36, physicians who are engaged to be married, might have first invested in a starter home as a stepping-stone to attaining their dream nest. Instead, they decided to stay in their rental until they could afford to buy (for $415,000, with 5 percent down) a robin’s egg blue New England colonial. The lovely 1927 house is in the same town, Shrewsbury, in which Brigid grew up. Over coffee and cookies in their new home, they mapped out their plans, short-term and long–to remodel, to adopt a dog from the rescue shelter, and to send their future children to the Catholic parochial school across the street that McKenna attended as a girl.
How long do they plan to stay in their house? “Forever,” she said.
The American Dream of homeownership may have been oversold–perhaps vastly oversold–but there remains no shortage of satisfied buyers.
By Paul Starobin
The writer is a contributing editor to National Journal and the author of After America: Narratives for the Next Global Age.