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 day.

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.