Home Ownership & The American Dream
November 26, 2008
Part Two: How Desirable is Home Ownership?
On Saturday I described the strange way that home ownership is marketed in America, as a type of investment vehicle and an equity-building tool. I suggested that homes are only (sometimes) profitable investments because we are allowed to buy them at incredible leverage ratios; these huge leverage ratios have also forced a lot of unsuspecting people into painfully difficult circumstances thanks to the recent housing crisis. Now that the myth that home prices will never decline has been shattered, and as thousands of Americans lose hard-earned wealth in the decline of their homes, another question to be asked is: how personally desirable is home ownership?
When I graduate from college next year, the first order of business will be to launch my career, and finding a place to live will be a close second. There is no doubt that I will be moving into a rental property. After graduation I will have a pile of student debt waiting to be paid off. In an optimistic scenario, I might be able to pay off most of the debt by my mid twenties and save up enough for a small down-payment on a home. Even so, I probably still wouldn’t want to do it.
Neighborhoods are constantly changing. Local newspapers are frequently littered with interviews of people who reminisce about the memories they have of their neighborhood. “Back in 1970s,” the stereotypical quotation begins, “this was a close-knit, working class block. Now, a lot of homes are abandoned, there are shady characters on the street corners, and my wife is afraid to go outside at night anymore.” Not every neighborhood goes from good to bad, of course. In August, Alan Ehrenhalt wrote a piece in The New Republic describing the incredible demographic change taking place in big cities across America. Neighborhoods like Lincoln Park in Chicago; the U Street Corridor in Washington DC; and Coventry Road in Cleveland, all transformed from being among the worst, most rundown, and dangerous parts of the city to the hippest, wealthiest, and fun places to live and spend time.
Cashing in on these demographic and neighborhood shifts requires forward thinking, intelligence and the willingness to purchase a home in a neighborhood that is still fairly dicey and lacks some of the amenities that the hotter neighborhoods have to offer. People tell me that Petworth is set to become the next hot neighborhood in Washington, DC; Wicker Park and Bucktown are up and coming in Chicago; and the Knox-Henderson neighborhood in Dallas should be fully developed in 5-10 years. Of course, this means dealing with some residual crime, limited amenities, and rolling the dice on neighbors. For a young home buyer, it also means spending the best years of their 20s in a neighborhood that won't fully develop until years into the future.
Home ownership marketing commonly refers to renting as a "money pit" - meaning that whatever you pay in rent is money you'll never get back. Paying off your mortgage, on the other hand, gets you that much closers to being a proud owner of your own home; a home that can later be sold for cold hard cash. There are, of course, costs associated with home ownership that don't apply to renters: property taxes, interest payments on debt, and inevitable maintenance and repairs all add up. Not being a homeowner doesn't mean you can't build equity, it just means you have to do it using different assets (stock index funds and bonds are the most obvious examples).
Renting also provides options for mobility. If you get a new job in a different part of town, want to live closer to friends, or just want to live in a more exciting neighborhood, a renter has the ability to easily do it. Breaking a lease can be annoying and sometimes costly, but the process of selling a home is probably even harder and just as expensive. Moving from one part of the city is one thing, moving to a new city or state entirely is even more challenging.
I'm not suggesting that home ownership isn't desireable for some. I am suggesting that it isn't as simple as calling it the American dream or telling anyone and everyone that they ought to aspire to own their own home. This attitude is at least partially responsible for creating the housing crisis we are frantically trying to deal with today, and it impacts both those who prefer to own their home and those who don't. It creates social stigmas that don't make much sense, and convinces individuals that they want to do something that isn't necessarily in their best interest. Believers in free markets will say that people choose where to live and whether to buy or rent based on their individual preferences. Based on what these same individuals often give as their reasons for purchasing a home... it makes me wonder whether clever marketing and social pressure can convince a person to make a decision as big as purchasing a home without fully understanding whether is for them or not.
See Also:
Part One: How Did We Get Here?
Part Three: What the Academic Research Shows
Part Four: Costs and Benefits to Society
On Saturday I described the strange way that home ownership is marketed in America, as a type of investment vehicle and an equity-building tool. I suggested that homes are only (sometimes) profitable investments because we are allowed to buy them at incredible leverage ratios; these huge leverage ratios have also forced a lot of unsuspecting people into painfully difficult circumstances thanks to the recent housing crisis. Now that the myth that home prices will never decline has been shattered, and as thousands of Americans lose hard-earned wealth in the decline of their homes, another question to be asked is: how personally desirable is home ownership?
When I graduate from college next year, the first order of business will be to launch my career, and finding a place to live will be a close second. There is no doubt that I will be moving into a rental property. After graduation I will have a pile of student debt waiting to be paid off. In an optimistic scenario, I might be able to pay off most of the debt by my mid twenties and save up enough for a small down-payment on a home. Even so, I probably still wouldn’t want to do it.
Neighborhoods are constantly changing. Local newspapers are frequently littered with interviews of people who reminisce about the memories they have of their neighborhood. “Back in 1970s,” the stereotypical quotation begins, “this was a close-knit, working class block. Now, a lot of homes are abandoned, there are shady characters on the street corners, and my wife is afraid to go outside at night anymore.” Not every neighborhood goes from good to bad, of course. In August, Alan Ehrenhalt wrote a piece in The New Republic describing the incredible demographic change taking place in big cities across America. Neighborhoods like Lincoln Park in Chicago; the U Street Corridor in Washington DC; and Coventry Road in Cleveland, all transformed from being among the worst, most rundown, and dangerous parts of the city to the hippest, wealthiest, and fun places to live and spend time.
Cashing in on these demographic and neighborhood shifts requires forward thinking, intelligence and the willingness to purchase a home in a neighborhood that is still fairly dicey and lacks some of the amenities that the hotter neighborhoods have to offer. People tell me that Petworth is set to become the next hot neighborhood in Washington, DC; Wicker Park and Bucktown are up and coming in Chicago; and the Knox-Henderson neighborhood in Dallas should be fully developed in 5-10 years. Of course, this means dealing with some residual crime, limited amenities, and rolling the dice on neighbors. For a young home buyer, it also means spending the best years of their 20s in a neighborhood that won't fully develop until years into the future.
Home ownership marketing commonly refers to renting as a "money pit" - meaning that whatever you pay in rent is money you'll never get back. Paying off your mortgage, on the other hand, gets you that much closers to being a proud owner of your own home; a home that can later be sold for cold hard cash. There are, of course, costs associated with home ownership that don't apply to renters: property taxes, interest payments on debt, and inevitable maintenance and repairs all add up. Not being a homeowner doesn't mean you can't build equity, it just means you have to do it using different assets (stock index funds and bonds are the most obvious examples).
Renting also provides options for mobility. If you get a new job in a different part of town, want to live closer to friends, or just want to live in a more exciting neighborhood, a renter has the ability to easily do it. Breaking a lease can be annoying and sometimes costly, but the process of selling a home is probably even harder and just as expensive. Moving from one part of the city is one thing, moving to a new city or state entirely is even more challenging.
I'm not suggesting that home ownership isn't desireable for some. I am suggesting that it isn't as simple as calling it the American dream or telling anyone and everyone that they ought to aspire to own their own home. This attitude is at least partially responsible for creating the housing crisis we are frantically trying to deal with today, and it impacts both those who prefer to own their home and those who don't. It creates social stigmas that don't make much sense, and convinces individuals that they want to do something that isn't necessarily in their best interest. Believers in free markets will say that people choose where to live and whether to buy or rent based on their individual preferences. Based on what these same individuals often give as their reasons for purchasing a home... it makes me wonder whether clever marketing and social pressure can convince a person to make a decision as big as purchasing a home without fully understanding whether is for them or not.
See Also:
Part One: How Did We Get Here?
Part Three: What the Academic Research Shows
Part Four: Costs and Benefits to Society
You appear to be looking at this from the Cleveland perspective, which, like the New York perspective, doesn't always apply everywhere (or anywhere) else. There's not much population growth here, and housing prices are largely stable. My experience as a person in my twenties in Washington, though, was that all housing, and particularly housing attractive to people like us, was getting more expensive all the time. If you were paying rent, you were always paying more rent. To us at that time, buying a place seemed like a way to participate in that instead of being hurt by it. Although, honestly, I didn't know many people that did buy, probably because the prices were just so high.