Cargo Cult Economics And Why We Should Stop Fetishizing Home Ownership

I have always thought that government policy to encourage home ownership was  counter-productive, even beyond its role in creating bubbles.  My sense is that those who advocate for such programs are engaging in what I call cargo cult economics.

Once upon a time, government officials decided it would help them keep their jobs if they could claim they had expanded the middle class.  Unfortunately, none of them really understood economics or even the historical factors that led to the emergence of the middle class in the first place.  But they did know two things:  Middle class people tended to own their own homes, and they sent their kids to college.

So in true cargo cult fashion, they decided to increase the middle class by promoting these markers of being middle class [without any consideration of which direction the arrow of causation ran].  They threw the Federal government strongly behind promoting home ownership and college education.  A large part of this effort entailed offering easy debt financing for housing and education.

I tend to be a lone voice in the wilderness on this (even those who oppose government programs for libertarian reasons often tend to fetishize home ownership).  But Ike Brannon at Alt-M seems to agree:

The pro-home-building folks aver that homeownership fosters civic involvement and helps people become more tied to their community, which encourages other behavior beneficial for the economy.  And for a good proportion of homeowners the majority of their net wealth is in their home, so it can be an important source of savings.

But another way to look at it is that correlation is not causation:  The reason that homeowners are more civic-minded and involved in the community is because such people are much more likely to have the wherewithal to save enough to make a downpayment on a house.  Ed Glaeser, the renowned housing economist from Harvard, puts little stock in the notion that homeownership has significant positive societal externalities.

What's more, there's some evidence that high homeownership rates have downsides as well.  In the last four decades the predilection for moving has slowed significantly:  only half as many people moved across state or county lines in any year this decade as was the case in the 1950s, for instance.  This is problematic because it means that our economy is worse at matching up workers with where the available jobs are.  The lingering unemployment in many rust-belt states would be less if some of their unemployed could be persuaded to move to another community where there are jobs.  There has been a decades-long move of people from the midwest to the Sunbelt, of course, but the data suggest there's ample room for more.  This hasn't happened in part because people are tied down by the homes that they own and are reluctant to sell while they are underwater.  That people are unable to ignore sunk costs isn't economically rational, of course, but it nevertheless governs how many people consider whether to move.


  1. tmitsss:

    Reynolds’ Law: “Subsidizing the markers of status doesn’t produce the character traits that result in that status; it undermines them.”

  2. kidmugsy:

    But would any American politician have the balls to start removing the absurd tax privileges of home ownership? Or the subsidising of higher education?

  3. DirtyJobsGuy:

    You could keep the modest tax subsidies for home loan interest if you went back to the old limits on jumbo mortgages. California and Florida's self induced real estate booms led to drastically increasing these limits and the risks for borrowers. Keeping down payments at 20% and housing mortgage limits at 30-35% of income would have kept most problems away. The real cause was that water-short or land short metro areas could not expand with reasonable housing costs. So instead of having the growth move to other areas, the local politicians distorted the mortgage guarantee industries. Once this happened, the social justice crowd pushed even less qualified people into the homeowning market. Implement a flat tax and eliminate almost all deductions, but also get the government out of the mortgage market completely.

  4. CT_Yankee:

    There are taxes, commissions, and fees for inspections and title searches and whatever else the lawyers dream up when you buy and sell a house. If you stay there for decades, and spread out the transfer costs while you live there, it becomes a modest part of the cost of ownership. If you sell within a few years, that same transfer cost (transfer costs did not add to the value of your property one cent, they are a total loss each time the ownership changes) is spread over a much smaller time frame, so it becomes a major cost of having bought the house. As the economy moves from long term with a single company to short term (often within the same industry) people move more, and have to adjust lifestyles to match the new reality. If you can not really say you will be living in the same place for at least half a decade, and it really should be more, it makes much more sense to lease someplace that already meets your needs, rather than buy and renovate.

  5. Joe Mama:

    Home ownership tends to drive low population density. If public transportation, walkable communities and wilderness sanctuary areas are important, then it is much easier to pull off with higher population density, aka, apartment buildings.

    It is common for the government to find itself working at cross purposes as it tries to be all things to all people.

  6. ColoComment:

    Let us as well recall the national, state and local political influence of the realtor associations, the national home-builder companies, the appraisers, title insurance industry, mortgage brokers, lenders, even those sellers of very lucrative mortgage insurance policies, who all have their fingers in the real estate industry pie.
    Residential real estate is a big, big industry, with lots of participants who've formed associations that use dues to pay lobbyists to influence our legislators.
    Home ownership used to be the reward for responsible financial habits and saving over time for that 20% down payment. There are too many interests invested in keeping all things real estate very loosey-goosey to ever hope to return to those days, I think.

  7. bigmaq1980:

    Part of the problem with any large scale changes to the tax system is trust.

    Trust that we are not somehow going to get scr*wed over. The net average might be revenue-neutral overall, but as in real-estate, average is not what we each sell our own homes for. Some of us will gain and some will lose. NOBODY wants to be on the lose side.

    So, flat tax, VAT replacement of income tax, etc, etc, it comes back to how does one sell it so that there is broad enough support to see it through.

    What Coyote says about the cargo cult of mortgage interest tax deduction can be said of a whole host of other shenanigans in the tax code, as it holds a good bit of social engineering, vote buying and special interests within it.

  8. HenryBowman419:

    Some refer to this as Reynolds' Law.

  9. marque2:

    Actually this is a misnomer plantedby leftists and RINOs who want to increase taxes and look righteous about it. And since most folks dont understand business and investment they go along with it. Yes you get a capital gains break when selling ,but then the government does not allow you to deduct all your interest, nor can you depreciate the house investment nor can you get taxbreaks for short term fixes or long term improvements. In any other investment you are allowed all of these. Also most other investment s aren't taxed until you sell them, homes get taxed anuually. (By the way, you should get yourself a rental property, it is a beginner course inhow to run a business)

    In the end the sales credit vs full deductibility is a wash - but you folks screening to be taxed higher for dubious reasons is infuriating.

  10. marque2:

    I think another reason that we get politicians encouraging home ownership is that long ago someone decided home building starts is a leading indicator, as well as stock market growth, so politicians subsidize new home starts and flood the market with money to make the leading indicators look better, and also because of the cargo cult belief that politicians goosing markets represents real future growth.

  11. gr8econ:

    Whether a household rents or owns a housing unit, they still need one. Housing starts depend on population growth and the rate of new household formation, not who owns the building.

  12. marque2:

    Government gives tax credits for new housing starts when the economy is percieved to be down, this causes a bit of a glut at the beginning of an upturn or an extended decline in housing prices.

    An example is in Cedar Rapids, IA where in the middle of the recession they decided to grossly expand housing to stimulate the local economy. Now there are empty houses still, and it is one of the few areas where housing prices haven't recovered. The subsidies come from all levels of government. It is not exactly a free market phenomena as you describe.

  13. wilfranc:

    This is what came to my mind too, but it never hurts to come to similar conclusions by different avenues.

  14. Craig Loehle:

    There is also a myth that home ownership is an "investment". While this may be true sometimes and when markets rise, it is not always true. If someone can barely afford to put up the down payment, what will they do when they need a new roof for $12,000? Or a new furnace? They will be in trouble. And if the economy turns down, they will not be able to sell their house because they can't afford to take a loss and will thus be unable to move to a place with jobs, as Ike noted. Such people would be better off renting.

  15. Q46:

    In Continental Europe, particularly Germany, home ownership is lower than UK (where it is regarded as a right) and the USA. Additionally owned property is passed down (in agricultural areas) through generations or anyway people do not see their house as an investment and rarely sell and buy somewhere higher up the property ladder.

    Consequently there are no house price bubbles and rents are more stable.

    On the downside the rental market in France is heavily regulated leading inevitably to a shortage or rental property, to which the solution is, yes of course, more regulation.

  16. stan:

    Remember that the mortgage interest deduction is the result of the government screwing the taxpayer and getting some pushback. Interest income is taxable and interest expense should be deductible. Just common sense equal treatment. And it used to be that way. Then the govt decided to continue taxing interest income, but eliminate the interest deduction. The unfairness pissed a lot of people off. Eventually, taxpayers and real estate special interests were at least able to save the expense deduction for mortgage interest.

  17. Titan28:

    I really can't disagree with anything anyone has said here. There are many downsides to home ownership, as are listed. And the idea that it's the job of the government to subsidize or encourage socially accepted, let's call them externalities, that rise up out of home ownership smacks of Orwell. Yet I for one would expect a society where only rich people owned homes, as they do now, with impunity, and in most cases, to excess, in style, location and numbers, to constitute something less than the "American dream."

  18. Ann_In_Illinois:

    Excellent point!

  19. DaveK:

    It's not just home ownership. The government has fetishized most of the trappings of middle-class existence, and is engaged in a badly failed effort to transform the welfare class into middle class by either providing those middle class trappings, or making them much easier to obtain. Unfortunately, middle-class trappings don't actually transform anyone. Degrees don't make people smart, and expensive houses and cars don't turn you into a better person.