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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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My, my, the comments here are more interesting that the actual article. It appears that many people have been thoroughly brainwashed by the real estate industry. It's simple: housing is a COST. You have to live somewhere. If it is cheaper to rent than buy (as has been the case during our recent bubble) then you are better off renting. Period.
As an investment, housing does NOT always go up. (Look at Japan - 24 years of flat or declining real estate values, and on a tiny island with a dense population!) Yes, housing sometimes crashes hard, as we are currently witnessing. Making your retirement dependent completely on selling your house later on has been shown to be a bad move, in light of recent events.
We've got a whole generation of people who have only seen housing values rise, and now that it is going down they can't compute the new information. Take a look around.
Over the last 25 years I've rented and I've owned. I much prefer renting - it's cheaper, I have more free time, and I've lived in better neighborhoods and generally have had more freedom. I will also be able to retire comfortably with the money I've saved. I don't know how homeownership could improve on that.
Mr. Marcitz,
The study at Penn was actually an old research page with a paper on SARS, and the housing market. I failed to see the relevance of your argument. Also, I am actually half-asian, so please do not EVER make assumptions about one's race in a forum. In any regard, about 15-20% of landlords in Northeast Philadelphia are actually Chinese. Many Chinese come down from New York, buy property, and rent it. So there goes your argument about owners resisting racial integration. And, they rent to wide array of ethnic people. In fact, Philadelphia has one of the nation's largest populations of immigrants. Before you make such large deductions from just a few isolated statistics I advise you to take up residence in a large urban area like Philadelphia, get involved with the community, and then explain to me the obvious differences between families that rent, and families that own their homes. Also, why do you think immigrants come here? Why are they so intent to make money? Where do they transfer that money? They buy homes, and property. They know for a fact that ownership is a key to community, and that community makes their presence stronger in a city, and state. This mortgage crisis is a temporary problem, but the fact remains... home, and property ownership is the key to long-standing wealth, and societal organization.
The 30 year mortgage was a good idea from it's inception in the late 30's to 1980. Since that time, it's been a nightmare. What are people thinking investing in a home when our government has been working full time destroying our economy since 1980. The only sensible option since 1980 has been investing in your 401k and or IRA. For those that did sensibly since that time, they have a retirement income today. Can homeowners that bought in the past 30 years say that now?
Of course owning your own home is a great ideal. What got lost in the push to make this ideal a reality was AFFORDABILITY. It is a pathetic, disgusting propoganda foisted on the middle class by the way too smart for themself greedy bankers and their investors who created the negative amortization nothing down adjustable rate loan that fueled the propoganda of home ownership is some kind of great thing. Having a roof over your head is all that matters. If you want to own it and make it your home, great. If you want to rent it, great. You can't take it with you, now can you? I'm a real estate agent and it sickens me, JUST SICKENS ME to see the lust that people had to buy a home as if their sense of self worth was tied into owning a home. And now these people are renting again. It was a SHAM! The only thing that matters is what you do for other people - your work, how you care for your family and whatever community you find yourself in. Having your name on a Deed recorded down at City Hall is NOT what gives ANYONE any more value than anyone else. America has become a land of opportunists. The opportunity for big business to turn us ALL into the land of the greedy and the home of the slaves to our debt. It's time we ALL looked in the mirror and pulled the plug on our system which creates this insane stack of cards with what, maybe 3% of us on top and the rest of us looking up drooling to be like them? I say smack down that house of cards and get rid of any incentive to carry debt - that's right - get rid of the mortgage deduction. REGULATE the banks and keep them banking ONLY and not speculating. Devalue all our overpriced assets and then homeownership for the massess can become a sustainable reality because it will be AFFORDABLE.
To me, home ownership was never about hoping to get money out of the equity later on. To me, the dream of home ownership was about pulling up in the driveway and seeing my children playing in their own backyard. Tending to the lawn and garden, taking pride in being able to fix something that is mine, and watching the trees that I planted mature into something beautiful; something beautiful that I created, and something one can never get from renting. And about being able to have the final say in how I want to paint it or make renovations. It's always been about something larger than simple financial ownership and the "hope" that I'll get a payday down the road. Which, if I stay here long enough, pay down the mortgage and eventually sell it. Then I do get a pay off. Last I checked, you don't ever get that with renting an apartment.
"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. ..."
Give me a break, if he pays normal rent, the rent will cover interest and maintenance for guess who: the landlord that "owns" the property.
I am a renter, but at certain price point between rent and own, renting does not make that much sense.
OK to clarify a few things:
1. No one is comparing apples to apples. With accelerating home prices and declining rent prices there actually was a point where renting was better than owning (financially, not emotionally, speaking). No one can say one is better than the other until they run the numbers as no one here is doing (and as a Marketplace listener I expected better from you)
2. The mortgage income tax deduction actually is a disadvantage. It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained good, means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays and you are only helping them out). Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)
3. Mr. Yun you are SO WRONG about the value of home-ownership on community. Study after study (I've listed some below) show that there is practically NO social benefit of homeowning vs. renting. In fact (and with a last name of "Yun" I would pay close attention to this fact) home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don't believe me check out these links:
http://real.wharton.upenn.edu/~wongg/research/The%20American%20Dream.pdf (Its a long academic study but just read the first paragraph)
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2003/0... (renters have better sex, too)
http://watchingmarcitz.com/2009/02/22/obama-hurts-100-million-to-help-9-... (this shows how home bailout programs have a dark underbelly)
http://www.theatlantic.com/doc/200903/meltdown-geography/6 (why renting is actually the answer to the problem we now face)
http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist... (NPR story on why renting may be better so now that is 2 NPR programs turning coat on the American homeowner)
4. Mr. Brooks you are also wrong in a challenging position about saying you are saving for your retirement. If you rent for less than it costs to own you can save the difference and provide for your retirement just like these renters:
http://money.cnn.com/2009/02/25/real_estate/boomer_wealth_evaporating/in...
5. Oh and to all of those that claim to be homeowners how many of you actually did 0% down adjustable rate mortgages under the assumption that if the adjustment was too much you would simply refinance again. Guess what - YOU ARE RENTERS (with an option to buy). Well that's OK because its like a stock and it will go up in value..wait this just in...they don't always go up in value. So now you are a renter that owes a big chunk of your savings back to your landlord/mortgage banker. To make the analogy clearer think of the amount you are underwater in your home value as the "security deposit".
This is not to say that home ownership or renting is better than one another. I am a renter who will become a homeowner when its cheaper than renting. They are equally valid lifestyle choices that work differently for different people and it surprises me that the majority of comments on this thread lack that nuanced perspective. To butcher Shakepeare (who I think was mostly a renter) - "The homeowner doth protest too much".
Want a different perspective check out:
or
watchingmarcitz.com
From the interview, it sounds that Mr. Phelps doesn't quite understand the concept of ownership. And, how home ownership, while burdensome at times, is an integral part of pride, self-worth, and identity. When an individual owns property or land, that person is tied to it. They are tied to the community, and the other owners around them. As a teacher in the Philadelphia Public School system, many of our students are transient. While I'm sure this is due to socio-economic reasons, it takes a huge toll on families. Children that are constantly moving from apartment to apartment end up having no real community identity, and in terms, have no real ties to a community. I'm sure there are tons of studies about the effects of transience on personal, and professional relationships. Now, home ownership reduces the transience of families to some degree, and it builds stable communities where children can form lasting bonds with one another. The parents are more invested in communities, and it builds a safe environment for families, and children to grow. I'm sure today's guest didn't really think about the community impacts of traditional home ownership. And, how communities being crippled through foreclosures, and growing transience in this country will ultimately affect the economic growth of our economy in the years to come.
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