The Downside of Homeownership

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,

like Ben

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

be devastating.

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

as well.

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.

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