Another challenge to the notion of home ownership

An article in The New York Times summarizes the arguments of two economists that concluded that increases in home ownership may lead to increases in unemployment.  I’ve always thought of home ownership as a waste of capital since people go out and borrow money to put into an asset that generates no income.

In my opinion the only beneficiaries are the banks that sell a consumer the money, and the initial landowner/developer that, though its affiliation with savvy real estate agents, that persuaded you to buy the property in the first place.

The economists mentioned in the Times’ piece describe home ownership as a negative externality on labor markets.  Think of an externality as either a cost or benefit accruing to society as a third party member to some primary transaction between buyer and seller.  In this case the externality is a negative because, according to the economists, home ownership may create a roadblock to further community development; the “not in my back yard mentality” that may prohibit the introduction of new businesses into an area.

I also found interesting the articles allusion to the negative impact home ownership may have on the flow of human capital.  If you are tethered to a 15-year or 30-year mortgage, are you going to move cross country to a job?  The best human capital may not be moving to areas of greater opportunity because it is tied to an investment of financial capital that is not performing in terms of generating income.

What does this mean for public policy?  It means that we have to examine why we turn a blind eye to policies that encourage us to stay stuck in debt versus move our capital around more freely.  The “ownership society” of former president George W. Bush was based on home ownership and President Obama is indirectly carrying that torch with the “preserve the middle class by modifying their mortgages” policy carried out by the Treasury Department.

The positions taken by the economists mentioned in the article are definitely in the minority and won’t be bought into the mainstream any time soon by policy makers or the general consumer public. Just look at those pre-2007 mortgage refinance ads popping up on TV more and more.  Telling Americans that their dreams of home ownership may be leading to a nightmare of economic morass won’t set well with them.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
This entry was posted in capital, debt, Economy, free markets, home ownership, labor markets, unemployment and tagged , , , , , , . Bookmark the permalink.

One Response to Another challenge to the notion of home ownership

  1. Kenneth Ciszewski says:

    “Telling Americans that their dreams of home ownership may be leading to a nightmare of economic morass won’t set well with them.”

    I remember a time when something even more ridiculous happened. During the late 1970s, when the Federal Reserve drove the prime rate up to 21% and mortgage rates hit 13%, there was a radio advertisement here in St. Louis, Missouri that told listeners that it was a great time to buy a home–“go for it!”. Yeah, right.

    If all the expense of owning a home, including repairs, taxes, insurance, and especially amortized mortgage interest are used to calculate the cost, the ROI is very low. If a person sells before the date of the final mortgage payoff, the ROI is even worse.

    For this reason alone, I agree with the home ownership is not a great investment. One way to improve the ROI is to pay ahead on the mortgage principal early in the term of the mortgage.

    The actual “benefits” of owning a home are more psychological–the home is a personal individual possession. In the US, which has a tradition of individual freedom and achievement, this counts for something. This is lieu of being beholden to a landlord forever.

    Also, there is somewhat more privacy than there is when living in an apartment or condo, and some freedom to do with the property what one wants. This freedom is not absolute, as there are restrictive covenants and zoning restrictions.

    A friend of mine once told me that single family housing got a huge boost after WWII when the government supported the building of the single family, mostly two bedroom one bath “spec” houses in what became the suburbs of big cities through the GI Bill, guaranteeing loans to veterans that had reasonable rates. This allowed them to move out of the old two and four family flats that were so prevalent in cities in those days. This favored treatment apparently did not extend to other types of housing (I was told). In a way, this was good thing, because all those veterans, and other young people, needed housing for their developing families.

    When homes were viewed as places to live, and prices rose slowly, this idea was reasonable. At some point in the 1970s, housing became an “investment” for speculators to buy (low) and sell (high) like commodities. This forced prices up at artificially high rates for a while, until that housing bubble burst. More recently there was a worse housing bubble that burst as part of the recent Great Recession.

    In my opinion, the whole “American Dream” concept of home ownership, upward mobility, and achievement, and home ownership, is nothing but a marketing campaign to make money for banks, real estate agents, title companies, and businesses. Of course, I’m extremely cynical about all of this.

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