The Myth of Home Ownership

This is my very first blog, so where do I begin?  Well, the economy is first and foremost on everyone’s mind.  Perhaps befitting to an inaugural blog, I will talk about what many think brought us here – housing. 

I’ve been known to be a housing bear amongst my friends.  To me, there always seems to be something weird about the fascination about home ownership.  It is only recently that I figured out what that something is – it is essentially a religion.  Or more precisely, a founding myth deeply embedded in the American psyche. 

Why do I say that?  Well, you can easily tack the housing at the end of any typical phrases that represent America, and it will rhyme so well that no one will notice you changed anything.  Try it:  “Motherhood, apple pie, and a roof deck”, “2 cars and a garage”, or the Herbert Hoover version: “a chicken in every pot and a car in every garage (or house)”  And lastly, “Mickey Mouse, Coca Cola and a balcony”, Or was that McDonalds?  I forget, you get the point. 

Of course there are many, many rational arguments on why you should own a house.  But let’s face it, for most people, the purchase decision was much more emotional than rational.  It is as if there is something magical associated with owning a home. 

Well, don’t get me wrong, I am not against home ownership at all.  In fact, I own a house (probably bought at the worst time no less).   However, what I don’t share, is the muddled thinking many people seem to exhibit when house purchase comes up. 

The point is: whether to own a house is a purely financial decision, not a lifestyle decision, period.  Whatever it is that you desire out of your home, you can simply rent it.  The only reason for someone to own instead to rent, is that the ownership is a better financial alternative. 

Let’s see all the typical arguments that “ownership is simply better,”  and see how they really hold up. 

1. “A rental is not home”: we’ve all heard the stories of $500 rent controlled apartments on Park Avenue of New York City where people only move out of when they die.  I bet you these tenants treat these apartments every bit like a home.  If you have a nice rental, where you can picture living in for a long time, why is it not a “home?”  A lot of people buy and sell their houses after 5 years anyway. 

2. “Rents are just throwing money away”: I am not sure what you call the monthly payment when you lease a car.  The fact is, you are getting utility out of the place you live, and you should pay for it.  The interest payment on your mortgage is the rent you are paying for borrowing the money to own the house.  It is really the same thing. 

3. “I won’t do home improvements on a rental because that is throwing money away”:  studies have shown most home improvements don’t really “pay”.  In other words, you are spending part of the home improvement budget because you are consuming the upgrade.  You are paying for a better place to live in.  Therefore, why wouldn’t you pay to rental a better place. 

4. “Home ownership offers the safety a rental cannot match:”  this one is great because it is so vague that it’s meaningless by construction.  If the concern is that a landlord can boot you out, then you can always buy after that happens.   There is no need to preempt it. 

5. “House prices always go up”: hopefully, we all agree by now this is not true.  However, I actually like this one, because we are finally getting somewhere.  This is essentially saying owning a home is better financially.  Now that we know this is not always the case, we can then rationally discuss whether or when to own a home, based on its financial merits.  Just like stock investments, you try to buy low and sell high.  When the rent vs. own condition is favoring renting, why would you not opt to rent? 

6. “But wait, there is tax deduction on owning homes, you don’t get that in rental”:  Of course, that’s why economists calculate the interest burden on mortgages net of tax benefits.  In other words, you compare outlays of post-tax interest expenditure on a mortgage vs. rent.  Don’t forget, you have to pay the interest first, then you get a portion of the interest back in tax deductions. 

7. “Home ownership is a vehicle for retirement saving and wealth creation, which cannot be matched by a rental”:  If you take the cash down payment in house, and invest in something that hypothetically returns 100% every year, isn’t a better savings and wealth creation vehicle than owning the house?  So clearly, you have to compare the home as a financial investment vs. all your other investment alternatives.  So to own or to invest in something else should be judged purely on their risk/return characteristics as investments. 

8. “Mortgages gives you leverage in the home investment, you are using the bank’s money to create wealth”: this is quite right, but don’t forget that leverage cuts both ways.  It definitely hurts in a housing downturn like the one right now.  However, the bigger point is that again, you can evaluate the merit of owning based on its financial merits – leverage considerations included.

To recap, rental is the opportunity cost of owning a home.  One can achieve any desired home through renting as well as owning.  Owning vs. rental should be a purely financial decision.  As a corollary, you only buy a financial investment because you think it is better than the alternative investments.  Hence, to buy or to rent should be a coldly rational decision based on calculated judgment on the merits of its financial aspects.  Of course, there is always the “dream house” you just have to own[1] and not available on the rental market, but really, have you ever looked as hard for that “dream house” in the rental market?

 

P.S: I believe the US has skewed to favor home ownership so much that the ownership is unnaturally high.  In addition to the psychological myths I tried to debunk above, there are the mortgage interest deduction, the existence of inherent conflicted GSEs, the government policies to favor ownership during the Clinton and Bush administrations, and the capital gain tax havens for selling a home - all created to distort incentives towards greater home ownership, even down to the very poorest of the population.  The benefits are highly dubious.  The European and Asian societies do not have nearly as high a level of home ownership, and they don't seem any less stable socially.  Why “ownership society” has to be specifically home ownership is unclear.  To have a stake in the society, one does not have to actually own a house or apartment.  Stocks, bonds, 401(k)s should be perfectly fine.  More importantly, education, social mobility, open society, rule of law, transparency and personal responsibility are far more important and desirable.  The perpetration of a myth of home ownership is simply unnecessary. 

P.S.2..: The idea of writing down my random daily thoughts in a blog came in a conversation with a friend.  It will definitely help keep track of my own thoughts. But perhaps more importantly, it acts as a way to channel my argumentativeness towards a format that is less confrontational and perhaps more acceptable to read.  Therefore, by its very nature, my blog will not come at specific time intervals and will not follow a specific format or train of thoughts.  However, I hope you will enjoy it, or failing that, at least find it objectionable enough to be worth the read and send me your opinions.

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[1] Believe me, as a victim of this infatuation, I know what I am talking about here.