Matt Cooper and I agree on many things: we agree that the tax deduction for
mortgage-interest payments should be abolished (although now’s maybe not the
best time to do it), and we agree that the subprime mess is messy. But Matt,
Stein and Jack
Flack, is a big proponent of the
virtues of homeownership.
Matt starts with what he calls "the financial benefits of home ownership"
– that one’s easy. Yes, homes today are vastly more valuable than they
have been at any point in the past, if you ignore the very tip of the peak a
year or so ago. As a result, anybody who bought a home a few years ago or more
is now sitting on a very tidy profit. I grew up in London, and friends of mine
who bought London apartments when they graduated from university have now, pretty
much without exception, made more money on their flats than they’ve made inincome
from their jobs. There are now the people who bought before the bubble, and
the people who didn’t, and there’s a vast wealth chasm between them.
But of course past performance is no indication of future returns, as the ads
say. Buying a house today is no guarantee of wealth creation tomorrow, and housing
prices can go down as well as up. What’s more, there are millions of subprime
borrowers who are unlikely to sign on to Matt’s rosy assessment of the financial
benefits of homeownership. If your mortgage payments are higher than prevailing
rents even as your mortgage balance is higher than the value of your home, you’re
not benefiting in the slightest from your decision to buy: quite the opposite.
And it’s not just subprime borrowers, either: here’s
a representative example of prime borrowers going through just as much pain.
A mortgage is a form of financial leverage, and leverage magnifies both upside
and downside; right now, it’s all about the downside.
What’s abundantly clear is that US house prices have stopped rising (outside
Manhattan, anyway). No one knows whether, over the next ten years or so, they’ll
go up or down. But if you take out a fixed-rate mortgage, you know exactly how
much money you’re committing to spend over the next ten years, and you can use
the wonderful NYT
calculator to work out whether or not you’d be better off renting. (Clue:
Yes, you would, and only substantial house-price appreciation can make the math
work in a home owner’s favor.)
At the margin, there are financial reasons to plump for homeownership rather
than renting: back in March, for instance, I noted
that homeownership is a commitment device, which forces people to build
wealth rather than fritter away their income on consumer products. But such
considerations are always marginal, and are generally obliterated by the big
picture. 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
Matt also talks about the social benefits of homeownership, citing (but not
linking to, unfortunately) a study dating back to 2000. But surely one key point
there is that the subprime market was to all intents and purposes nonexistent
in 2000. Yes, there might well have been a correlation, in the 1990s, between
people who bought homes, on the one hand, and people whose families suffered
less crime and had better health and had fewer divorces and so on and so forth.
This is understandable: buying a home is entails a huge commitment and obligation,
and the kind of people who willingly shoulder such commitments are more likely
than those who don’t to be fine upstanding members of society.
But then the subprime explosion happened, concurrently with the housing boom,
and suddenly housing was a get-rich-quick scheme, and the people taking out
no-doc no-money-down adjustable-rate mortgages turned out not to be exactly
the same people who took out plain-vanilla conforming mortgages back in the
In other words, the relationship between housing and stability might well have
broken down during the last housing boom. Over the past few years, I’ve spent
enough time in both places to see the huge difference (to take two admittedly
extreme examples) between the feverish property-mania of Orange County, California,
on the one hand, and the long-term stability of families and other renters in
Stuyvesant Town, Manhattan, on the other.
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.
So yes, Matt, there are good reasons for homeownership, some of them
financial. There are also good reasons to choose to rent, and a lot of those
are financial too. Ultimately, a mortgage is a financial product, which carries
a certain cost. Depending on the price of that product, it’s sometimes a good
buy and it’s sometimes a bad buy. In the case of adujstable-rate subprime mortgages,
most of them were bad buys, which only made financial sense if you
intended to either flip or refinance during the two-year teaser-rate window
at the beginning of the loan.
The fact is that a culture of homeownership has both upsides and downsides;
one of the downsides is the lot of those who don’t own their homes
in such a society. There are large parts of the US and the UK where the price
of admission, essentially, is a mortgage; people who can’t or won’t get one
end up marginalized and less successful. It’s the flip-side of what Matt calls
"the social benefits of homeownership", and it can be ugly. In rich
societies where homeownership is less ingrained, there’s often a lot less inequality
So you will forgive me for not getting excited about anything and everything
which raises the rate of homeownership. I do think that in many cases –
including my own – it is a good idea. But I do not think that
generalizing wildly and saying that the greater the rate of homeownership the
better is useful. The realities are more complicated, and the downside can often
outweigh the upside.