Is Home Ownership An Unalloyed Positive?
Tyler Cowen pointed out this article on the widening gap between white and black home ownership rates. Black home ownership rates have fallen pretty steadily since the financial crisis -- apparently when banks are castigated by activists and government officials for "exploiting" blacks by giving them easy credit, blacks no longer get as much easy credit.
For people trying to rise in their economic status, there are a lot of things wrong with home ownership. The most important is that it limits geographic flexibility. Home owners have much higher costs to pick up and move, making it harder and less likely to exploit opportunities for better work and/or lower living costs in other parts of the country. And as someone who just had an $8000 air conditioning unit fail in 110 degree heat, I can testify that home ownership also involves more risk of large unexpected expenses than does renting. All things considered, in a free market, there are a lot of reasons home ownership might be a bad idea for folks trying to rise in income.
The complicating factor, as usual, is it is not a free market. Public policy has tipped the scales such that home ownership has become probably the most important of all middle class savings vehicles. Part of this is a human behavioral issue -- people contribute to homes every month because the bank makes damn sure that they do so (sort of like having a really tough personal trainer). No other savings vehicle has such strong incentives not to cheat on monthly contributions. But even so homes would still not be such a great investment vehicle. In a 30 year mortgage, the percentage of your monthly payment in the early years that goes to equity is trivial. There is really no reason that a home should be anything more than a depreciating asset, like a car or a boat.
Which brings us to the public policy angle -- a myriad of policy interventions all conspire to make sure that home prices rise continuously. On the demand side, demand is subsidized via special government mortgage programs, special treatment for mortgages on bank balance sheets, the mortgage interest tax deduction, as well as a number of direct subsidies for lower income folks. We even had QE where the government was buying up mortgage bonds to keep interest rates low. On the supply side, supply is constrained through growth boundaries, density limits, zoning restrictions and a zillion other local regulations. The net effect of this subsidized demand and constrained supply is (with a few interruptions) ever-rising prices.
While many of us decry crony capitalism, most every homeowner in this country (including me) is a crony. We benefit from this program that like most all other crony capitalist programs, benefits incumbents at the expense of new entrants. In this case, those of us with houses get to enjoy a good rate of return on our home investment while those without homes are shut out of the market by rising prices.
