Is Homeownership the Promised Land?

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Congress has begun to debate the first of some two-dozen bills intended to reform the housing finance system, and though the Obama administration recently conceded the limitations of pushing homeownership, the debate still seems beside the point.

In Genesis, Jacob falls asleep and dreams of a ladder that carries man from Earth to Heaven, each step bringing him closer to the eternal kingdom of God. For generations, our housing policy has resembled something like the promise of that dream. Policymakers and the housing lobby have made a virtue of homeownership - a grasp onto the rungs of the economic ladder leading to the grace of wealth accumulation.

President Bush often spoke of an "ownership society," saying in 2002, "we want everybody in America to own their home." But the financial crisis created something like a "foreclosure society" and should cause us to reconsider whether homeownership uber alles is really the Promised Land.

It's been an unquestioned truth for decades that buying a home is the best investment one can make, a truism reinforced by our national character. Owning a home is, after all, the better part of the American Dream. And there are no doubt deep benefits to abiding this cultural refrain. Homeowners have a clear stake in their communities; they have higher credit scores than renters (at least before the crash); and of course the wealth-increasing effect. But there also tends to be more segregation, lower job mobility, and increased energy use.

Real estate is uniquely both a consumption and investment good. We consume housing by enjoying the amenities of our property: its location, our neighborhood, its features and our privacy. And as home prices tend to go up (so we're told), we treat our house like an investment, hoping to increase our wealth over time. In theory, when demand for investment exceeds consumption, we buy.

But for decades we've put our thumb on investment's side of the scale. As a result we witness prices far above what they would be in a pure consumption market. And pro-housing policies don't just increase the demand for home buying, but actually increase leverage.

The deductibility of mortgage interest and property taxes, for example, is more valuable the more expensive your home is, incentivizing the purchase of larger homes. Additionally, a house purchase will be the lion's share of most people's investments, making it difficult to optimally diversify our portfolios. A great deal of household wealth is left riding a pro-cyclical carnival ride of house prices.

The political pressures of this national market strategy may be even more costly. Imagine if over 60 percent of the country was heavily invested in the same company: what do you think the pressures on politicians would be? They would seek to protect the returns on that one stock, even at great cost to others.

The effects of housing policy go beyond family finances. As Harvard economist Ed Glaeser points out, mortgage subsidies have altered the course of our urban landscape. The rise of modern suburbia, for better or for worse, has come at high cost to our urban centers, not least of all because of artificial distortions to market forces.

As a wealthy democratic society, we find it morally unacceptable that people go without shelter. But a roof over one's head doesn't have to come with a promissory note. Nonetheless the debate about housing policy on Capitol Hill is hopelessly fixated on mortgages. While technical issues like unwinding Fannie Mae and improving bank regulations are important, these issues are buffeted by plaintive cries of "Whither homeownership!" Meanwhile, we're forgoing the real debate about what homeownership means to us and how much we (ought to) value it.

This all comes down to a social question: how much are we willing to spend on housing? Or put another way, what are we willing to give up? Princeton economist Edwin Mills once calculated that, but for overinvestment in housing, GNP would be 10 percent higher. That was in 1983 - Lord knows what that number would be today.

In the play "Back to Methuselah," G.B. Shaw reimagines Jacob's Ladder in reverse, employing it to describe Adam's fall from grace. Having discovered mortality, Adam no longer sees the point in maintaining Eden as a "highly desirable country residence" and lets it fall into disrepair. From there Adam falls inexorably down one step after another.

Homeownership is actually somewhere between Heaven and Hell, consisting of both benefits and costs. A more virtuous housing policy would fully account for both.

 

Satya Thallam is Director of the Financial Markets Working Group at George Mason University's Mercatus Center.  He is contributing editor of a forthcoming volume on housing finance reform. 

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