(4 of 4)
The mortgage-interest tax deduction provides an even sharper case study. Nearly half the people in the 2010 Fannie Mae survey said tax benefits were a "major reason" to buy a house. Yet the mortgage-interest deduction isn't even claimed by many homeowners. To get it, you have to itemize on your taxes, and more than a third of homeowners don't. The bulk of the benefit goes to wealthier households that probably wouldn't have trouble buying a home without the deduction. According to a 2010 analysis by James Poterba of the Massachusetts Institute of Technology and Todd Sinai of the University of Pennsylvania, the 2.8 million homeowning families with an annual income of more than $250,000 save $15 billion a year thanks to the deduction. Meanwhile, the 19 million families making from $40,000 to $75,000 save $10 billion. For those middle-class households, the average annual tax break is worth $542, or $1.48 a day. Are legions of middle-class families able to buy houses because they save $542 a year? Doubtful. The U.K. got rid of its mortgage-interest deduction years ago, and its homeownership rate is still higher than that of the U.S.
More unsettling yet is the way the mortgage-interest tax deduction entices people to borrow big: you get the deduction for the interest on the loan, not for owning the house or paying down the debt. Sinai, a self-described "pro-ownership guy," recalls how his accountant once suggested he buy a larger house in order to get a better deduction. "I nearly bit his head off," says the normally mild-mannered economist. "We conflate the idea of homeownership with extravagance."
But even if the government were to change the extent and the ways in which it underwrites homeownership, we would still be stuck with a stock of housing that has very largely been shaped by the bias toward owning. When Kirtie Lo, a newly minted hand surgeon, called up a real estate agent in Hutchinson, Kans., (pop. 40,000) to find a place to rent, the agent told her she'd want to buy. Lo was moving from Connecticut on a one-year contract, and she actually didn't want to buy, but she quickly understood what the agent meant about the city. "They do have apartments," says Lo, pausing to find the right words. "But they're not luxury apartments."
That, often, is what people mean when they say their top reason for owning a home is to have a good place to raise children. They want to live in nice neighborhoods, and in the U.S., that often means you have to buy. In an ideal world, the way you pay for your shelter shouldn't reflect your socioeconomic status. In Switzerland, one of the world's richest nations, two-thirds of all families rent. Yet in the U.S., whether you own or rent says something about who you are and often limits where you can live.
Here again the hand of government is evident, but this time at the city and county level. Harvard economist Glaeser has looked at how local governments, often spurred on by existing homeowners, restrict housing type. Of the 186 towns and cities within 50 miles (80 km) of Boston, 34 forbid multifamily dwellings such as townhouses and apartment buildings, and another 81 allow them on less than 10% of the available land. People who don't buy stand-alone houses for the most part, renters are not welcome. And that doesn't just happen around Boston. "In many parts of the country," says Glaeser, "renters are zoned out."
Some demographers predict that the attitude that most areas should be the exclusive province of single-family homes on big tracts of land will change as Baby Boomers tire of four-bedroom houses with lawns to mow and big property-tax bills. That would be a huge adjustment, one that is at times hard to imagine. But there is reason to try.
The Cost of Easy Credit
What is perhaps the worst side of the homeownership fetish is dark indeed: for many years, the fact that our house prices were rising enabled us to ignore deep structural changes taking place in the American economy. For decades, income inequality has been growing, and middle-class wages have been stagnant. In the eyes of at least some academic observers, cheap credit, especially when used to buy ever-larger houses, has been a way to get people to feel O.K. with their lot. "Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly," writes Raghuram Rajan, an economist at the University of Chicago, in his new book Fault Lines. "The expansion of homeownership a key element of the American dream to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption." Pumped up on credit-card debt and home-equity loans, we kept spending away and felt richer than we actually were.
If the U.S. is ever to break that cycle, we will have to go through a well-known list of changes: save more, invest in people through better education and training, and use the levers of government to help create high-quality jobs the sort you can raise a family on instead of coaxing people into becoming homeowners.
That is no small order. But if there ever were a time to start weaning America off the idea that homeownership cures all our ills, now after the worst housing crash in 75 years would be it.
Stuck in her house in Maryland, unable to move for her husband's dream job in California, having spent thousands of dollars and countless hours on various home repairs, Jenn Hartzell reflects on their decision to buy a house. "It's been a really big learning experience," she says. "I would say I'm glad that I did it." Then she stops. "I think I am. I'm not sure." When her friends tell her they're considering buying a house, she says, "You know, it's not what we were raised to think it would be."
This article originally appeared in the September 6, 2010 issue of Time magazine.