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Why home ownership is U.S. obsession
Edmund Phelps, director of Columbia University's Center on Capitalism and Society.
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TEXT OF INTERVIEW
Kai Ryssdal: So you grow up, get a good job, marry, you have a couple of kids, and buy a house. It's the American dream, right? But a lot people got in trouble chasing that last part and helped take the economy down with them. In today's installment of Taking Stock, our series of occasional conversations with people who can give us the longer view of our economic situation, Columbia University economist Edmund Phelps and American attitudes toward home ownership. Phelps says that dream of owning a house has been fueled, in large part, by the government.
EDMUND PHELPS: Democrats and Republicans have been very keen to make home ownership almost a national purpose. President Clinton got through Congress a 1997 act to force mortgage lenders to relax the conditions on loans for low-income people. And then there were tax breaks on capital gains and houses in 1998. But I have to say that it isn't just public policy. The banks, which used to have something to do with business lending, sorta of lost their expertise in that area, and they began to focus all their lending efforts on residential mortgages and other soft targets.
Ryssdal: Let me ask you this, though. Because if the government gets rid of the home-mortgage interest deduction, I for one will be extremely annoyed, and so will the 70 percent of Americans who own their own homes. I mean, it would be a sea change in the way we look at homes in this country.
PHELPS: Yes, it would be. But to me it makes a lot of sense. Because, look, this is a very funny kind of asset in which the owner of the asset gets the services of the asset -- the shelter and the comforts and so forth that the asset provides -- and at the same time, as if the owner was paying income tax on those services, the owner gets to deduct the mortgage costs.
Ryssdal: Is that a bad thing?
PHELPS: Yeah, to me that is quite crazy. There are only two logical ways to go: one is to deny mortgage-interest deductibility because no tax is being paid on the benefits, or start taxing the benefits.
Ryssdal: You're a renter, aren't you?
PHELPS: I am a renter, you caught me. But that's not why I have these positions. It just happens that I'm a renter.
Ryssdal: Well, when you live in New York City it can be tough to own, right?
PHELPS: Lots of us here in New York City are renters, yes. We're a very strange breed.
Ryssdal: Well, even though you've made peace with the idea of renting, for a lot of people it is a dirty word out there. I mean you have to make the rent every single month. You're just giving this check over to the land lord, and you're not getting anything out of it. Do me a favor and weigh the pros and cons of renting or not.
PHELPS: If you rent, that's it. You don't have to pay any interest to anybody. You don't have to pay any maintenance costs to anybody. You don't have to worry about whether the boiler is going to break down. While if you own your own home, you have a hundred aggravations. Maybe the roof will leak while you're overseas. In strict money terms, there is no reason to think there is a systematic, long-run, sustainable, durable difference between the two.
Ryssdal: Is this home-ownership obsession that we've had, has it affected the rest of our economic lives? Does it change the way we save? Does it change the way we spend in other regards?
PHELPS: Of course, while house prices were going up, that became a substitute for saving. People would refinance their homes, take the profit and spend that, hoping that prices would go up again. And then they would do the same thing and spend that. But I do think this home-ownership craze does tie in with a newfound fashion for spending rather than saving. I'm old enough to remember in the 1930s and the 1940s when thrift, frugality was considered an important virtue. In those days we all knew Benjamin Franklin's aphorism, "A penny saved is a penny earned." Today, the official doctrine seems to be that a penny spent is a penny earned.
Ryssdal: Do you think professor that there's a way to change the housing paradigm in this country? That it is the American dream, and if you have the material means, you ought to buy a house.
PHELPS: I'm hoping that the administration and other thought leaders will succeed eventually in bringing the country back to the older idea that the American dream is having a career, getting a job, and getting involved in it, and doing well. That was the core of the good life. That's what we have to get back to, and get away from this mystique that the most important thing in your life that could ever happen to you is to be a home owner.
Ryssdal: Edmund Phelps at Columbia University. Thanks so much for your time.
PHELPS: You're welcome. Good to be here.
Ryssdal: Edmund Phelps won the Nobel Prize in economics in 2006. He's the director of Columbia University's Center on Capitalism and Society.
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I am reading all these opinions here about owning a home versus renting one, benefits. Which is actually better? I personally rent.
I would accept the idea that the home ownership has some benefits as mentioned here in some of the opinions.
The problem I see is that the home ownership can not be a one way street for the owners. What I mean is that owning a home is a big responsibility. You have to pay property taxes,insurance,utilities,pay the mortgage maintain it and etc, and one should not count on ever rising prices to make up the difference of this responsibility if the paycheck can not handle it.Homeowners should also realize that housing ownership is not a gamble as it has been up to now.It should not only be a good thing to own a home when prices are rising but it should be the same when prices are dropping even if it means that it might destroy you financially. It should not be allowed to just dump a home (that promotes such great things as mentioned here by passionate homeowners) and walk away and have the taxpayers pick up the tab as it has happened. I think,I would say to the homeowners the congress should pass such laws that
once you agree to pay a mortgage the loan to the bank should only be a recourse loan by law( a recourse loan will mean that if you do not pay the loan, the lender will come after you with everything they got till they get paid).After all a homeowner borrowed the money with the intent of paying it,right? This will mean that a homeowner will rip both the benefits and the downfall of the home ownership when tables turn and not just dump the home into the foreclosure and pass it to the bank when things go sour. The congress should also remove the interest tax deduction benefits as that leads to home price speculation and does not treat everybody the same, such as us renters.Only then can we discuss here in this forum the real benefits or fallouts of owning a home.
Only then can a homeowner tell us how much sleep is he getting at night to make sure he keep paying the mortgage as well as the benefits of owning a home and strong communities.
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Why do so many people here make ridiculous assumptions about the professor's home? His point isn't that everyone should rent. It's that public policy that tilts so heavily in favor of property ownership damages the economy without creating unalloyed benefits for individuals or societies. The combination of mortgage-interest deductions and capital-gains exemptions for homeownership is an abomination. The tax burdens on workers could be lightened if we stopped treating homeowners as a new-age aristocracy. And I'm baffled by the person who defended homeowners against accusations that, as a group, they have long favored racial segregation. The post says that New Yorkers of Chinese descent have bought a bunch of houses in NE Philly and rented them out. That is not a defense of homeownership. In fact, it is the opposite, because these owners are landlords.
Peter Tobias, two things I'd like to comment on:
1)Phelps(as someone pointed out), as a
University Professor, may indeed be living in heavily subsidized or even free housing(we don't know at this point), but if so, Phelps' comments should be taken with a goodly pinch of salt, as his views may be slanted by his personal housing situation. It's easy to "pooh-pooh" the idea of home ownership hwne one is occupying what may indeed be a heavily subsidized and
unusually favorable rental situtation in an Ivory Tower. Again, we don't know if Phelps has such an advantage, but if he does, his views carry less weight, IMHO.
As for "fetish", I would say buying a sensible modest home that is well within
one's means(such as our parents and grandparents did) isn't a "fetish". Done right, and under the right circumstances, it was smart, and a solid way to systematically "move up the ladder" in a safe, prudent and conservative manner.
What I consider a "fetish", is what so many irresponsible homeowners did, and wound up bringing financial disaster upon both themselves and now, even those of us who had nothing to do with the credit crisis, housing crunch, bank failures and economic meltdown that now threatens us all:
Buying homes they couldn't afford, buy McMansions to feel and *appear* wealthy,
taking out HELOCS and 2nd mortgages to finance marble countertops, the best Sub-Zero has to offer, and adorning their driveways with expensive toys, all the while indebting themselves for an entire working lifetime to do so, and totally dependant on home prices rising forever, to have a chance at being able to afford such a lifestyle on an income that at it's core, simply
can't sustain that lifestyle. THAT's a fetish, IMO.
Watching Marcitz, thanks for the polite response. I think it may highlight how to properly frame this discussion. I lived in Houston for 20+ years - coincidentally moving there right after the oil (and related housing) boom of the mid-1980's burst. Since that time, housing prices have been stable and increasing moderately. We had no real bubble here, nor did we get a corresponding bust. Even in this environment, I sold my house last month for quite a bit more than I paid in 2001. We are now looking to buy in another relatively stable market - Austin, Texas. My experience is rational stable housing markets.
California, New York, Vegas or Florida - on the other hand - have been anything but stable markets for the last 10-15 years - and I think that represents an entirely different experience. In those markets, I concede, I think I would rent. Actually, and I hope this doesn't anger anyone, I won't consider living in those markets precisely because the cost of living (a large part of which is housing) is too high in my opinion. I think many home buyers in those markets made mistakes by buying high, trading up houses, cashing out equity, adding over the top home improvements and now had to face their margin call.
But my contention is not just that home buying is more attractive or unattractive depending on the real estate market you are in. I think consumer prudence plays a huge role as well. Even in your neighborhood, if a prudent person bought a home they could afford 10 years ago and then stayed put, pre-paying their mortgage when possible, maybe refinancing but never cashing out equity, and avoiding upgrades they could not afford to pay cash for - my contention is that person is doing just fine today. Of course, I am assuming that if the same prudent consumer was forced to move in 2005, they would have recognized prices were irrationally high and chose to rent. My point is: perhaps we are both prudent consumers given the markets we live in.
I wanted to add one other point to my previous post: Even in it's present run-down condition, I could rent out my future retirement digs for $250-300 a month, effectively getting the property I can't presently live in due to economic/job circumstances, to pay my rent up here on LI while I wait for the economy to turn around, while the best a renter (stuck in a lease) could hope to do, is sublet and maybe break-even.
In short, I have the same flexability of being able to relocate and rent wherever I want, with the added advantage of having the option to put my
little dump to work for me, and pay if not all, at least a significant portion of my rent, wherever I choose to live.
Phelps has it right, homeownership has become a fetish in American politics, instead of being part of a personal decision to rent or to own. For the future of democracy and capitalism, it is important that many people own something, to have a stake in society, but what they own, should be left to themselves and not skewed by the tax code: stocks, bonds, CDs, or a house, if they do want to.
Both renters and home owners in this blog defend their point of view to rent or own, however their argument is missing a point: renting or owning does NOT necessarily apply to every household in the U.S.
For example, if you examine house price statistics in small midwest towns across the country (Dataquick), you may notice that house valuations did not depart from 2-3x the household income; some actually stayed in line with 4% inflation rate. However, San Francisco bay area (the place I live in) has seen house prices quadrupled from 1996 to 2006. People who could not normally afford due to their low income bought $800-900K 3-bedroom startups and shacks with ARM and often with no money down (thanks to Clinton's 1997 act). Their argument had been "house prices are going up; if something happens, I sell it for more than I bought it for". Their greed was rewarded when "overall" median house price came down close to 30% from its peak for the past 2 years; now, they are either slaves to an eternal debt or being foreclosed. Of course, some of these people were innocent; they were simply the victims of their realtors, loan officers and followed the "flock" syndrome: "everyone is buying one! Why not me?".
This economic crisis will be with us for a long time; the unemployement rate in CA has climed over 10% and indicators show higher figures for 2010 and 2011.
If you are employed in CA (especially in the Bay area) and thinking of buying a house here, think at least four times; then take a cold shower and think some more! Because, neither the pride of home ownership nor your next granite countertop would be as important as putting a meal on the table for your family every day.
David S, actually it is quite possible because it depends when everyone bought their house because that forms the cost basis upon which they determine their rental price (well actually the "floor" of the rental price). The market determines "the ceiling" and they find a price somewhere between those two.
Their cost basis could be much lower than those of other houses thereby leading to a lower rental for a comparable property. So I live in Palo Alto and while houses have gone up 3X in the past 10 years rents have gone up about .5X. Using your logic this isn't possible if you go out on that limb. Of course, and this still weirds me out, now that prices are falling you would expect rents to come back up but in fact they are falling as well (I assume that mini-bubble will end soon).
So yes it is very possible. I have comped my rental property to others for sale and it is much cheaper for the same property.
Also everyone forgets that interest is rent (money that is thrown away) as is property tax (again that will vary with your cost basis)
Oh and with my rent I don't worry about my security deposit going up. In an owned home equity is like a security deposit that can wind up demanding you chip in to it. Just ask anyone who is underwater. They now have a massive security deposit that they have to PAY to get OUT of their current place. At least I'm allowed to leave my place and at worst I give up 1 months rent.
Check out this link in which those reaching retirment are worse off than renters:
http://money.cnn.com/2009/02/25/real_estate/boomer_wealth_evaporating/in...
Thank you, however, for giving a logic based argument (which we may still disagree on) as opposed to an emotion based argument.
Watching Marcitz, you said "You may find that renting may actually be cheaper." So your argument is that in my retirement I might find a landlord who will rent me a comparable property for an amount less than the cost of the landlord's property taxes and maintenance (gardners, roofs, painting) etc. Sounds good, and I admit it is not impossible (especially in this market), but I am going to climb out there on a limb and suggest most landlords want to rent at a decent profit.
I also forgot to add that a fixed rate mortgage is also just that - fixed. If you assume 3% inflation, over the long term and in real terms my mortgage decreases 3% every year while your rent increases 3% a year. Maybe that is not a huge deal to some, but the mortgage on my first house in 1995 was $474. It was a lot to me then, but now I might have enough change lying around the house to cover a monthly payment. Of course, the key to the benefits I find appealing is to never cash out your equity. In my book, if you are going to cash your equity every few years, you should absolutely be renting.
Again, I have nothing against renting ( I am a renter now), but it is not for everybody.
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