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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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By the way when you retire your home isn't free even if its paid off. You still have property taxes (which are more expensive in retirement because you are in a lower tax bracket therefore they return less on April 15th) as well as maintenance (gardners, roofs, painting) etc... You may find that renting may actually be cheaper.
Also you may want a different lifestyle. With more time on your hands you might want to live in the big city as opposed to the suburbs (or vice versa)
Again I'm not advocating one or the other but these blanket statements that one is better without any actual math being done is silly to dangerous.
I don't think Mr. Phelps is wrong, so much as he elects to overlook the what ought to be the primary goal of home ownership: minimizing expenses during retirement. I prefer to own, but chiefly because I don't want to pay RENT OR A MORTGAGE when I retire. My mother and grandmother were both able to save money each month with social security as their chief source of income. Owning their property outright was a huge reason why. At my age (41) - social security is anything but secure - so home ownership is just a small piece or my overall retirement planning.
Mr. Yun,
The study dealing with homeowners fighting racial integration was a Harvard study and not a Penn Study. Additionally the Penn (Wharton) study I linked to is from 2009 so it is hardly old and it is the one that says, and I quote, "There is little evidence that homeowners are better citizens."
Here is the link:
http://real.wharton.upenn.edu/~wongg/research/The%20American%20Dream.pdf
With respect to the Harvard study it did say this was an issue during the 1960s and 1970s but here is the quote from that study and how home owners are trying to limit supply anyway which prevents first-time home buyers (many whom are minorities).
Here is the quote from that study:
"What's more, homeownership has a dirty little secret, according to a study by Harvard researchers Edward Glaeser and Jesse Shapiro.
"Homeowners, not renters, have been more aggressive in fighting racial integration, especially in the 1960s and 1970s," the Harvard study stated. "More recently, homeowners have spearheaded the movement to limit new housing supply that has artificially inflated housing throughout the U.S. Essentially, as owners have organized, they have started to act like local cartels, restricting new entry into the market."
True, many people prefer to rent, but where did Professor Phelps get the idea that having a successful career is an older and inherently better dream than owning one's own home?
Besides the "territorial imperative," owning a home can satisfy basic human needs for security, safety, constancy, and personal freedom in a way that renting does not. I would bet the desire "to own" came into vogue with the invention of agriculture and permanent settlements.
I live in an area with very low housing turnover. Few of us cashed in when real estate prices skyrocketed. Most of us have been here for decades and intend to be here until we die. We are nesters. These "funny assets" are not just houses, they are our HOMES.
It upsets me to think that a Nobel Prize winner and economics professor does not seem to understand the concept of "home," apart from its monetary significance.
The New American Dream?
Be both an landlord and a tenant!
That's right - you by my house & I'll buy yours! We'll pay each other full service rentals to include energy costs, cable TV and internet and get to deduct not just mortgage interest but interest on appliance purchases, deductions for yard maintenance, repairs, etc. - Plus we get to depreciate everything too! We'll not only have non taxable cash flow but write-offs against other income as well!
For some people, renting makes perfect sense, and, at least in the short term, will probably be cheaper than owning.
But as a couple of other posters here
suggested(and I agree), renting as a lifetime housing strategy is probably not such a good idea - unless you have a *solid* and substantial guaranteed income that you can depend on to pay your rent(and any and all increases that may occur over time), I personally think it's much better to aim for a retirement in an inexpensive, low-tax home that you own free and clear, rather than be stuck paying market rent
for the rest of your life on a fixed income.
Sure, there's subsidized housing for seniors, but there are often waiting lists, and let's face it, with the TRUE National Debt being said to be more like $60 trillion, would you bet the farm that those subsidies will still be around and available when you're ready to retire?
And what about Social Security? I have 11 years to go, and I'm not betting the farm that EITHER of those programs will be there for me when I need them. How's your IRA looking these days? What if the PBGC goes under, and with it, your pension check?
In these uncertain times especially, I think it's much better to plan your retirement with the *possibility* that some or all of the income you were expecting may be reduced or eliminated.
I rent here on LI, but own a cheap little 3bdrm fixer upper in an excellent location south of the Mason-Dixon that I got for the price of a good used car. I bought it as "insurance" for the security of owning a cheap little place free and clear, and having the prospect of actually being able to retire now be a real possibility.
Property taxes are $150 a year. That works out to about $13 a month. If you were to rent a 3 bdrm in the same area, it'd run you at *least* $400 a month. If all I'm gonna have to live on is a meager $800 or so from SS, I know where *I* wanna be when I retire.
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