On the Burden of Home Ownership

The Harper's image and title on this subject are much more compelling than the ones below, but The Economist provides a timely update on the now-familiar story in this report.

Shelter, or burden?
The social benefits of home ownership look more modest than they did and the economic costs much higher

IN A scene from the film “It’s a Wonderful Life”, a happy couple is about to enter their new home. Jimmy Stewart, whose firm has sold them the mortgage, reflects that there is “a fundamental urge…for a man to have his own roof, walls and fireplace.” He offers them bread, salt and wine so “joy and prosperity may reign for ever”.
That embodies the Anglo-Saxon world’s attitude to home ownership. Owning your own roof, walls and fireplace, it is thought, is good for householders because it helps them accumulate wealth.

The National Association of Realtors still touts that, don't they?

You have to wonder how long that will be the case if there are no appreciable gains in home prices for years to come, an outcome that is more likely than any other.

Back to the story...

It is good for the economy because it encourages people to save. And it is good for society because homeowners invest more in their neighbourhoods, engage more in civic activities and encourage their children to do better at school than do renters. Home ownership, in short, benefits everyone—not just the homeowner—and the more there is of it, the better. Which is why it is usually encouraged by the government. In America, Ireland and Spain, homeowners can deduct mortgage-interest payments from taxable income.

Yet the worldwide crash was bound up in this supposed miracle of social policy.

Yes, conventional wisdom is often wrong...

It's funny how all the booming Western economies of a few years ago such as the U.S., Ireland, England, and Spain, all of which had massive housing bubbles, were not seen for what they were at the time by more people.

The graphic in this story is also well worth a look as it plots German home prices alongside prices in the bubblier countries. Those Germans never did get with the no money down, no income verification required approach and - surprise! - no housing bubble.

There's a second story on housing in the current issue as well - Building Castles of Sand.

To their credit, The Economist was an early spotter of the global housing bubble as it was forming.

Comments

[Leftfield:]

Government has long exacerbated social dysfunction, taxing the good to subsidize the bad. They took a societal good thing, home ownership, and turned it into part of the cancer that threatens to devour our society now.

Anyone with a positive balance sheet or remaining credit (taxpayers as a whole, at least while the dollar is the reserve currency) is being shanghaied in the service of supporting the perpetrators of the largest financial debacle in history.

Our leaders call for more of the same and keep it coming.

Apr 20 11:12 AM

[gordon:]

excellent post, pig. Ask yourselves, why should richer people get to deduct more mortgage interest? It should be a standard (fair) deduction for EVERY homeowner. Actually, it shoud be ELIMINATED. Why should renters be punished? This is about the monopolies, created by lobbyists in Washington, who own the politicians(Dodd, Frank): the banking, real estate, mortgage industry, a $8,000 credit to buy a NEW home? Now? With at least 18 months inventory? Why no outrage on this?

Apr 20 11:12 AM

[gordon:]

Left: on ur point, look how banks are getting free money and not paying interest to the conservative prudent savers. Again, the corrupt monopolies are destroying this country. This is killing seniors with savings. When's the last time you heard a lobbyist on tv talking about the plight of seniors? Obama is another facilitator, owned by Goldman Sachs, starting with Geithner's pick. Real depressing.

Apr 20 11:17 AM

[notsosmart:]

the house is a liability & not an asset.its not an atm machine as many have now learned the hard way.the scoundrel wall st bankers dont want you to think that way. they want fees & interest @ every opportunity.the dumb sheeples will continue to get fleeced.the new wall st mantra is trade,trade,trade.they dont want long term investors as they need trades to make money since they cant sell phony rated AAA paper to the world anymore.its ok though-the stadiums still seem to be filled with the beer swillers.

Apr 20 11:24 AM

[Mark Wallace:]

Until the recent crack up, housing has been a pretty good investment for the last 60 years. There were three reasons for this: a growing population and a fixed land supply; inflation; and abundant credit. The 2000 - 2007 surge in prices was entirely due to reckless lending. Although the government is pulling out all the stops to keep the housing credit bubble inflated, there is no way in world the lending environment is going to return to NINJA type home mortgage loans any time soon. It would not surprise me at all if it turns out that housing prices are lower in 2020 than they are now.

Apr 20 11:55 AM

[Allan Frain:]

Part of the air (that actually remains) in the housing bubble is that the Tax Code allows a deduction of mortgage interest and property taxes. Hence renters subsidize homeowners. This is because a nation that issues debt-money prefers debtors to savers.

Apr 20 12:11 PM

[Still Renting:]

I was very much in agreement untill that last sentence. On a side note, my son owns several rental properties - and rents his own home. It works out really well. He owns real estate, yet is afforded the freedom of movement only renting ones home offers.


On Apr 20 07:39 AM abetterplace wrote:

> Surely no one thinks that this country can stand as it is without
> the "dream of home ownership" staying intact and it will.

Apr 20 01:47 PM

[Gedankonomist:]

There's one important point missing in this article.

That is, the so-called "property tax." It is rent which you pay to the government. So, if you are really renting "your home" from the government, what is the incentive for "owning a home?"

One of Karl Marx's planks was the abolition of all private property.

That has effectively been done in the US under the pretext of the so-called "property tax." In fascistic governments, the people think they own property, however it is the government that controls the property, so in effect the government owns the property. In a communistic society, the facade of "private ownership" is stripped off.

So you could say that our society is fascistic in terms of property ownership, however the only difference between this situation and communist one is the window dressing. And most people judge what they see solely on what's on the surface, so they think there is a difference.

Apr 20 02:05 PM

[West Coast ...:]

All right folks - here is a view from a German living in happy-bubble-land (a.k.a. SF Bay Area, California):

First of all, home prices back in Germany did not get up because of the F*****G SOCIALISTS are taxing the crap out of people. If you live here in the U.S. and complain about "high taxes" (and at the same time curse crumbling freeways on the way to work - why's that?), let me tell you - nowhere close. An average hard-working head of a family has to fork over more than half of his/her income to the vultures and if he makes the mistake to venture into a shop after that "happy" experience, he is allowed to bleed again to the tone of 19% sales tax. Any economic growth comes from exports.

So where is all that quickly approaching half of GDP going? New freeways in the former communist East (to empty business parks where unemployment is at 30%+) and institutionalized layers over layers of buerocracy. 4 million state parasites, eh "servants" suck the lifeblood out of Germany's future. And as a warning to the U.S. (on a similar track!): Once you got to this level, self-preservation is the name of the game. You will not find a single (!) politician that critisizes that system. Case in point is the socialist's (SPD) head contender for chancellor this fall, foreign minister Steinmeier. A buerocracy child par excellence - but no intention whatsoever to cut the apparatschiks. Worse - no they are proposing an additional "rich tax". That's why I'm here. There is no future except a crash there, and especially no real estate appreciation!

On the other hand: I am really happy about the U.S. real estate from-renters-to-landlords money moving machine. And that is even after loosing 200k on our condominium from the peak. Our effective tax rate is only about 21% and once we are renting the place out, we can deduct the WHOLE PURCHASE PRICE over 30 years from the taxes. I never would have imagined such an institutionalized system to keep the non-homeowning minority poor. So, in comparison to socialist European countries like Germany (with a renting mayority), there IS NO "BURDEN OF HOME OWNERSHIP" here, and home prices will rise again. These strong inflationary settings will ensure it. It is a truly superior system and leads to long-lasting prosperity. The dollar will fall, but we will have full employment again. Any comments?

Apr 20 03:07 PM

[notsosmart:]

you never own your own home.as long as it can be taxed & even eminent domain(thanx supreme court) can now take it in favor of a rich developer.sadly,this country is on a downhill slide. most of the world loves it.

Apr 20 03:10 PM

[henarl:]

Owning a home is a good thing only if you can afford that home. After WWII in the 50s and 60s a family was able to purchase a home and support it with one income. However, that home was a 1200 sq. ft. two or three bedroom. one bath house, with a single car garage. It was good enough for the average young middle class family then.
Now the average young middle class family thinks they have to have a 3000+ sq. ft. three or four bedroom and den, three and 1/2 bathroom McMansion with a three car garage, cathedral ceilings, jacuzzi, granite counter tops, etc., etc.
Fat City for the builders, bankers, real estate brokers, and local taxing bureaucracies but disaster for the average family that now needs two and a half jobs to support this unnecessarily exorbitant lifestyle.

Apr 20 04:12 PM

[I am not a ...:]

You actually describe Australia too when you speak of post WW2 Germany today. lots of mindless infrastructure spending ( $750 ml football stadia,and no hospital funding etc etc ) High taxes and unbelievably high house prices in the last 8 years. With onluy two main gocery retailers we also have the most expensive food in the world .
But it all pales into significance when you see OZ politicians propping up the housing sector with $20,000 home buyers grants ,which effectively raised house prices $20,000.
We have much to learn from the American experience and the japanese experience of the 80's through to the 90's. At least I mean our politicians have yet to learn.....


On Apr 20 03:07 PM West Coast Commentator wrote:

> All right folks - here is a view from a German living in happy-bubble-land
> (a.k.a. SF Bay Area, California):
>
> First of all, home prices back in Germany did not get up because
> of the F*****G SOCIALISTS are taxing the crap out of people. If you
> live here in the U.S. and complain about "high taxes" (and at the
> same time curse crumbling freeways on the way to work - why's that?),
> let me tell you - nowhere close. An average hard-working head of
> a family has to fork over more than half of his/her income to the
> vultures and if he makes the mistake to venture into a shop after
> that "happy" experience, he is allowed to bleed again to the tone
> of 19% sales tax. Any economic growth comes from exports.
>
> So where is all that quickly approaching half of GDP going? New freeways
> in the former communist East (to empty business parks where unemployment
> is at 30%+) and institutionalized layers over layers of buerocracy.
> 4 million state parasites, eh "servants" suck the lifeblood out of
> Germany's future. And as a warning to the U.S. (on a similar track!):
> Once you got to this level, self-preservation is the name of the
> game. You will not find a single (!) politician that critisizes that
> system. Case in point is the socialist's (seekingalpha.com/symbo...)
> head contender for chancellor this fall, foreign minister Steinmeier.
> A buerocracy child par excellence - but no intention whatsoever to
> cut the apparatschiks. Worse - no they are proposing an additional
> "rich tax". That's why I'm here. There is no future except a crash
> there, and especially no real estate appreciation!
>
> On the other hand: I am really happy about the U.S. real estate from-renters-to-landlords
> money moving machine. And that is even after loosing 200k on our
> condominium from the peak. Our effective tax rate is only about 21%
> and once we are renting the place out, we can deduct the WHOLE PURCHASE
> PRICE over 30 years from the taxes. I never would have imagined such
> an institutionalized system to keep the non-homeowning minority poor.
> So, in comparison to socialist European countries like Germany (with
> a renting mayority), there IS NO "BURDEN OF HOME OWNERSHIP" here,
> and home prices will rise again. These strong inflationary settings
> will ensure it. It is a truly superior system and leads to long-lasting
> prosperity. The dollar will fall, but we will have full employment
> again. Any comments?
>
>

Apr 20 05:38 PM

[ngwun:]

A thing can be "good" & while abuse of that thing may be "bad", the thing may remain bad.

Apr 21 12:01 AM

[curious cat:]

thanks to the foreigners who contribute their "outside" perspective to this site. i play tennis with some canadians, germans, thai, chinese, japanese, korean and vietnamese transplants. we used to call these foreigners "d.p.'s" for displaced persons. they all have the same story to tell. america is still the land of opportunity. we can keep it that way, not through hate mongering, but through the political process. i encourage everyone to contact their representatives in your local and federal governments.

Apr 21 07:33 AM

[Pstoneki:]

Amen brother. As someone who lived in the back of my Land Cruiser for 6 months (although sleeping in a Utah canyon next to the Colorado River) I agree that 4 walls and a warm shower aren't too bad.

I bought my home to be my family's home, not an investment. I bought one I could afford on one income, that I could afford to heat, furnish, and maintain. And I'll live there until I move from this city.

I have lot's of colleagues who complain about the high cost of homes, how much they have lost in value, etc. Of course, they bought a $750k McMansion that required the wife and 4 kids working to pay for, put down 0% because they didn't have much more, and sit in plastic lawn furniture because they couldn't afford the furnishings. All for an 'investment' rather than a home.

I think they're nuts.


On Apr 20 09:28 AM Dr.Jackpot wrote:

> Years ago I tried living in the back of a VW bus and taking a bath
> using a cold gallon of water poured over my head while standing outside
> naked in the dark. But I have come to prefer my pristine acre of
> ocean view property in a heavenly surrounding. The fact that it is
> now only worth $2 million instead of $4 million doesn't worry me
> too much since I bought it 40 years ago for $39,000. My advice would
> be 'get one' and keep it and stop watching it like a stock every
> day. Not having a home is like not living.

Apr 21 10:22 AM

[HardwoodFlo...:]

Last weeks Economist ( with the populist cover) had a great analysis of the housing industry too. It was very short but basically said that we are so far below the needs of shelter in this country that building needs to increase by 300-400% just to keep up with demand- I think they said we are at 25% of housing demand- at 4-500K units. However, that building rate only supplements what is being taken out to the system (attrition of existing housing is 4-500K a year- these are tear downs et al.) Sure sounds like "it's a wonderful life" and the great depression doesn't it?

Apr 21 12:24 PM

[HardwoodFlo...:]

in regards to people complaining about the "home mortage tax" dedcution. give me break. So what. Certainly with property taxes contimually escallating the deduction of the home mortage tax makes sense at least to me. i would rather have my local community spend the tax money than the federal governement. the property tax I pay not only goes to local schools but to parks and community services. i have no idea where or what boondoggle the money that goes to Washington is supporting. It's home owners who pay proerty taxes that make those services happen- why shouldn't we get a tax break from washington for makeing our communities better places to live. eliminating the home mortgage tax dedcution is just stupid.

Apr 21 12:31 PM

[Pstoneki:]

One key fact about property tax - the land your house is on, extended to most of the structures built upon it, was originally owned by the US Government (except for some land in the original colonies). The land was granted to the first private land 'owner' either as a land grant or out right sale. Either way, the government still holds a lien on the property. That lien is realized through a local property tax as a way to support local services.

The only way you have any claim to not pay property tax is if you are a native American on reservation land (hence now a sovereign nation) or the King of England granted the land to your family before independence.


On Apr 20 02:05 PM Gedankonomist wrote:

> There's one important point missing in this article.
>
> That is, the so-called "property tax." It is rent which you pay to
> the government. So, if you are really renting "your home" from the
> government, what is the incentive for "owning a home?"
>
> One of Karl Marx's planks was the abolition of all private property.
>
>
> That has effectively been done in the US under the pretext of the
> so-called "property tax." In fascistic governments, the people think
> they own property, however it is the government that controls the
> property, so in effect the government owns the property. In a communistic
> society, the facade of "private ownership" is stripped off.
>
> So you could say that our society is fascistic in terms of property
> ownership, however the only difference between this situation and
> communist one is the window dressing. And most people judge what
> they see solely on what's on the surface, so they think there is
> a difference.

Apr 21 03:11 PM

[Hugh Pavletich:]

These housing bubbles were caused by creating artificial land scarcities - as illustrated by the Annual Demographia International Housing Affordability Surveys - available at demographia.com.

Why did Texas housing remain affordable - while California experienced a massive housing bubble? The answer is obvious.

Hugh Pavletich
Co author - Annual Demographia International Housing Affordability Survey
Performance Urban Planning
PerformanceUrbanPlanni...
Christchurch
New Zealand

Apr 22 10:55 AM

[svyoder:]

Everyone in this country DOES NOT have an "equal chance." Inherited family wealth, connections, and transferred assets -- and early life opportunities provides by the family for a good secondary education -- now determine how far one can go...never more so than now.

We don't choose our parents, thus we are now a caste society with little social/economic mobility, especially that the New Deal legacy has been dismantled, the economy highhacked by Wall Street and the national debt eliminating social programs that used to level the playing field.

Goodbye, American Dream.


On Apr 20 07:39 AM abetterplace wrote:

> At this point current home ownership in the US is only damaged. It
> will recover and not take but a few years to be back at an acceptable
> level. You are right in saying that the crash was bound up in this
> miracle of social policy. That policy being the relaxing of credit
> policies allowing too many people that were not qualified financially
> to buy a house that was out of their financial means and with little
> or no down payment. This policy was not out of "conventional wisdom"
> but rather political humbug. I am sorry, but not everyone in this
> country is equal. We all have an equal chance. From there it is up
> to the individual.
> Surely no one thinks that this country can stand as it is without
> the "dream of home ownership" staying intact and it will.

Apr 27 05:17 PM