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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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E. Phelps has an interesting point of view... wrong! but interesting.. He's missed the point of It's a Wonderful Life and seems to be siding with Potter! Work hard, but don't own anything. But then he is a director.. hmmm.. what's up with that.
Sorry, I'll continue to own my own home thank you....
I was astonished by your Columbia Nobel laureate and his views on home ownership. First, the emphasis which Americans place on home ownership is not a recent phenomenon. It stems from the Jeffersonian ideal of the small farmer, and the cherished opportunity to control one’s own destiny. Home owners don’t need to worry as much about noise from the next apartment; about roaches coming in from that apartment; about trash collecting in shared spaces. They also don’t need to worry about being thrown out of a favorite set of digs within30 to 60 days at a landlord’s whim.
Even for the dirtiest, most slovenly person, however much filth he may generate and be willing to live with, someone else’s filth and squalor is anathema. One may not be rich or energetic enough to repaint very often; but tired paint becomes more irksome when the remedy is a landlord’s responsibility. Small wonder that nearly every woman and man desires, at some point, to have a home of their own. Even mobile young professionals, who want, or need to move frequently, hope to settle somewhere, someday. Many are as much as anything else seeking the ideal space to do so.
Then there’s the tax issue. Current demographic trends make it highly desirable for the government to encourage home ownership, and with it, a stake in maintaining property. Anyone who has ever tried renting property in low or middle income areas knows how difficult is to collect rent on a consistent basis, and how difficult it can be to find tenants that are considerate of a landlord’s property. Everyone hates the landlord. Lower income people cannot afford to pay the costs of shoveling snow, mowing lawns and picking up litter; but most are also unwilling to take care of these chores themselves, even when contractually obligated to do so. Many even allow trash to collect, or fail to set it out for collection in a lawful manner. In such cases, the landlord receives the citation.
The bulk of the American population is becoming poorer and less considerate of the property of others. Low income neighborhood rentals breed angry, alienated tenants as well as angry, do-nothing slum lords; it is nearly impossible to run property honorably and profitably in such areas. The money just isn’t there. Tax breaks for homeowners encourage low income home ownership. Owners have a stake in their homes and their neighborhoods, and the proliferation of low-income rentals that so often degenerate into slums is arrested. Those who succeed in making it happen for themselves live better. There is no mystery here, and little question that the tax breaks that support lower class home ownership are a bargain in consideration of the benefits provided
I agree with RC Brooks's comment above. In addition, I would add this: I don't know anything about Edmund Phelps's personal situation, except that he is a professor at Columbia and that he says that he is "a renter ... But that's not why I have these positions. It just happens that I'm a renter." Nevertheless, I would be curious to know if by this he means that he is 'renting' in Columbia's (heavily subsidized) faculty housing system. (Many major universities in the NY area rent apartments to their faculties at a fraction of market value and allow them to keep one of the university-owned apartments after retirement). If so, it would explain his apparent lack of appreciation that for most Americans, especially those living on the coasts (plagued by rapidly rising rents), home ownership is the main (perhaps only) strategy for avoiding poverty (possibly even homelessness) in old age. The fact is that for most of us today the "older idea that the American dream is having a career, getting a job, and getting involved in it, [is] ... the core of the good life" will not hold true after retirement, if it ever did before.
If Prof. Phelps is not 'renting' in Columbia's house system, I would be sincerely curious to know how he plans to meet rapidly rising NY area rents once he is on a fixed retirement income, especially in the face of the currently disastrous declines in all sectors of investment.
I believe the notion of renting vs buying is a matter of one's finances and perspective on life. As RC noted earlier, if one is lucky to be sitting a large sums of money, to rent or buy is a non issue...simply because you have choices others with less money don't have.
My personal perspective on the renting vs buying issue, finances not withstanding, is as I get older, I am more agreeable to trade possessions for experiences.
Example. I could sell my house as I get closer to retirement, invest the tax-free profit from the sale, then rent a comfortable place inexpensively, freeing up extra money (in addition to retirement savings) to travel, retire early, charity work, or explore a new hobby. This premise assumes you manage the money wisely into the future.
I was horrified at listening to Prof. Phelps! I am 38 and I just NOW got into a house, after assuming I would never, ever be able to afford it in California.
After very carefully looking through my finances with the help of my CPA, we figured out what I could afford. It was based on my income and on the deductions allowed. I bought a modest condo in the best neighborhood I could afford, close to my daughter's school and too my work.
If Prof. Phelps had his way I would be out of luck. I would lose my new home, as I assume would many, many others. Do we really need another round of foreclosures? Because I predict that would happen. I hope his logic doesn't win out.
I believe the professor misspoke on the requirements of the 1997 Community Re-Investment Act. It did NOT loosen criteria.
Please fact-check this as I believe you will find that none of the entities subject to the act have had a large increase in defaults. Outfits like ACORN, etc. have new homeowner screening & training about the process of buying a home.
The banks & investment banks were the ones that copycatted each other. If some is good, too much was barely enough.
Also, the "subprime" problem has already been eclipsed by the greater housing problems that have hit - Greenwich CT !!
This is the type of information that should have either preceded or followed the interview - BUT I agree with the professor that home ownership is not necessary for an "American Dream" to happen.
Renting allows you to concentrate on other things.
pronounced "gryson"
I don’t agree at all with your guest today, Edmund Phelps. He admitted that people in New York are strange, and they are. Manhattan’s tiny size, crammed together living, and astronomical prices require that people spend their lives in small apartments, usually rented, surrounded by concrete. People in most other parts of the country live differently, and have a more independent idea of how we want to live. For many of us, the loss of the tax deduction for mortgage interest at this late date would make it extremely difficult or impossible for us to keep our homes, and probably lead to another round of foreclosures. I deeply resent Mr. Phelps’ implication that ordinary people shouldn’t feel a need to own the place they call home—outside of Manhattan it’s a strongly felt emotion. The fact that our Federal government decided to make it easier for people to own seemed to me to be an “AT LAST†moment—government really trying to help people make their lives happier. I’m a 64-year-old woman who owns a comfortable condominium surrounded by trees and grass and beautiful views. I like that fact that I make all the decisions about the condition and design of the inside of my home. I don’t have to ask someone’s permission to paint, re-design or redecorate. I don’t worry about a tight-fisted landlord not keeping things up to par, or deciding that he wants the place back and I have to leave (which happened to me in the past). Seems to me that most of the people calling for the deletion of the mortgage interest deduction are those who don’t need it. Funny how that works.
Mr. Edmunds stated that the Democrats are obsessed with people owning housing. Wasn't it just 3-4 yrs ago when President Bush bragged that home ownership was the highest it had ever been. Did it not grow faster during Bush's terms than any other time?
Wow, this is a really ridiculous argument.
You are paying interest, in fact you are paying someone else's interest.
Assuming you are NOT sitting on a million dollars or more when you retire, how will you afford to live? Through buying your own home, you are providing for your retirement.
He speaks of savings, but do you really advocate giving over 10% of you life's earnings to someone else so they can own property.
And, to say its not taxed? I don't know about other people, but I have had to pay property taxes for quite some time.
This is not very hard to figure out.
Ok, say you rent the same home for ten years. Then, the land lord decides to sell out to developers. While you do have a contract for the present, you can bet you will be packing your bags when its up, whether you want to or not.
Or, if landlords only change places... will you current arrangement be fine with the new landlord. Your brother lives with you and your family. Old landlord said it was fine, you new landlord hates the idea and won't allow it.
Certainly there are situations where renting is useful, particularly to those who may relocate frequently to follow their job.
For most Americans however, we do not have millions nestled away, due to the constraints the industries we work in, have on pay. And for what we do earn, is it wise to throw that hard earned money into an asset for someone else?
While there was a lot of jargon during the housing bubbles, some precepts were absolutely true.
Renting is usually more expensive than buying, largely due to the fact that maintenance and taxes are usually plugged into that figure.
It's similar to leasing a vehicle. You get use of it, but when the term is over, you have nothing to trade in. Hope you have been saving your pennies.
As I said, for some it makes sense, but for a great many of us, it's foolish to rent our whole lives. Particularly those with limited incomes. Those with lower incomes will have a much harder time putting any significant money away for a nice retirement community. With what limited savings they will likely have, it would be much better to not have to pay rent when living on a fixed income.
Talk about common sense... we definitely need more.
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