The Case Against Homeownership

Buying a house is supposed to make us better citizens, better investors and better off. But that American Dream may well be a fantasy

By Barbara Kiviat Saturday, Sept. 11, 2010
    • Vincent Laforet

    Suburban development outside Lancaster, PA

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    Yet even when the economy had regained its footing after World War II, Washington's encouragement of homeownership continued. At first, homeownership was a handy way to prompt a transition to a higher standard of living: from cold-water flats in cities to tree-lined cul-de-sacs in the suburbs. But with each new Administration, some fresh advantage appeared, and rarely was the benefit questioned. Bill Clinton set out to create 8 million homeowners, and George W. Bush another 5.5 million. In 2002, Bush said, "If you own your own home, you're realizing the American Dream" — though when historian James Truslow Adams coined that term in 1931, he didn't say anything about owning a house. Still, "before the bubble burst, homeownership was a win for everyone," says historian Vincent Cannato, a professor at the University of Massachusetts at Boston. Whether you were looking to promote personal responsibility, ease the postwar housing shortage for returning veterans, help the poor establish a financial foothold or drum up jobs in a labor-heavy industry, homeownership was the answer.

    As a consequence, Washington lavishes homeowners with special treatment. When they file their income taxes, they can deduct mortgage interest and property taxes. When they sell, they don't have to pay tax on the first few hundreds of thousands of dollars in profit. In 1986 the tax code was rewritten, disallowing the deduction of interest from consumer loans like credit card debt, but an exception was made for the interest paid on a mortgage — a caveat that cost the government some $80 billion in lost revenue in 2009.

    Then there is the mortgage market. In the 1930s, the government wanted private investors to start a secondary market for the buying and reselling of mortgages to bring stability and lower rates to the market. When no one did, the government created Fannie Mae and, later, Freddie Mac. The agencies provide a great service to the American home buyer — those 30-year fixed-rate mortgages, which are awful for lenders, might not exist in great numbers without them. But the way these outfits have been configured in recent decades is flawed: they are aggressively profit-seeking yet implicitly backed by the government. That allowed Fannie and Freddie to borrow funds cheaply — and helped keep mortgage rates low — but meant there was little incentive for investors to monitor what the agencies were doing, even if it was so risky that their eventual bailout in September 2008 would cost more than $150 billion.

    One Nation, Stuck in Place
    Star Korajkic, one of America's newest homeowners, doesn't particularly care about all this history. What she cares about is being able to paint her daughter's room purple without asking anyone's permission.

    Until February, Star lived in a rented apartment in Burlington, Vt., with her husband Danijal and daughter Alina, 6. Now the family lives in a modest Cape Cod, which they own. Danijal works 11-hour shifts as a truck driver, and Star works two jobs in order to make the mortgage, but the sacrifice, she says, is worth it. "It's amazing. We can do whatever we want. We can plant a garden. We can sit outside and have music and a cookout. We can live a normal and nice life."

    No doubt, for many American families, buying a home is a smart choice. On paper, putting nearly all your liquid assets into a single piece of property may look foolish, but in practice it often works out beautifully, with the mortgage paid off just before retirement, leaving a couple with a cheap place to live in old age. The point of questioning the virtues of owning a home isn't to question the decisions of families like the Korajkics; it is to take into account the trade-offs involved.

    One major trade-off: mobility. Being free to move around the country easily means that people can go where the jobs are. Fifteen years ago, Andrew Oswald, a professor of economics at the University of Warwick in the U.K., was one of the first to note that places with high homeownership rates seemed to have high rates of unemployment as well. Indeed, some of the U.S. cities with the highest rates of homeownership have stagnant Rust Belt economies: Detroit; Allentown, Pa.; Rochester, N.Y.; Akron, Ohio. "The economy is changing all the time, and we need people to be mobile in order to drop into the right job slots," Oswald says. Where most people own their homes, rentals are sparse, which makes it tougher for workers — especially young, nimble ones — to redeploy.

    The inflexibility that pervasive homeownership brings to labor markets has a cost. Lawrence Katz, an economist at Harvard University, notes that Americans, compared with other nationalities, are more prone to move in the wake of downturns. In a classic 1992 study, Katz and Olivier Jean Blanchard, then at the Massachusetts Institute of Technology, found that it takes U.S. regions about six years to recover from a local spike in unemployment, and during those six years the same number of people who have lost their jobs leave the area. "It's not that the jobs that disappeared come back," says Katz, "but that people move on to new areas with new opportunities." In a typical year, some 40 million Americans move — and nearly 20% do so for a job.

    Unless, of course, they can't. And that is the case for many now. In the wake of the April expiration of a short-term tax incentive to buy, existing home sales are again falling. With property values depressed, some 11 million homeowners now find themselves owing more on their loan than their house is worth. Even if a likely buyer appears, a sale is not a sure thing. Jenn Hartzell looked into selling her family's house in Glen Burnie, Md., when her husband retired from the Air Force and came across his "dream job" — working as a radio program director — in San Diego. But the value of the house was less than the amount the couple still owed on their mortgage. "We couldn't do it," says Hartzell. "We couldn't leave."

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