Homeownership As a Bad Investment in a Dream

In doing some catch-up reading this morning, I noticed our former colleague Ryan Cooper going on quite an eloquent tear at his new perch at The Week. His target was the most sacred of cows, the American Dream of Homeownership, whose perils we have just experienced graphically, without any significant dimunition in the Dream’s power:

Homeownership has long been the way American society has divided itself into a responsible, stable bourgeoisie (owners) and an undisciplined rabble (renters). The divide used to be along stark, overtly racial lines, enforced by white supremacist terrorism, but nowadays the distinction is a bit more subtle.

Traditionally, we’ve promoted homeownership by making houses the primacy vehicle for middle-class savings. The problem is that a house is a crap investment.

Just think about it: Why wouldn’t it be? It’s only land plus a big durable good. Houses don’t increase in productivity to provide more sheltering services; they just slowly fall apart. If median-income people borrowed hundreds of thousands of dollars to speculate on the price 30 years hence of a single, highly illiquid asset that wasn’t a house, they would be called financially insane.

But the inherently risky nature of real estate speculation as a the bedrock of democratic capitalism is, of course, disguised by massive public subsidies for mortgage debt, supplemented by land use policies that tend to force housing prices up–until they inevitably come down, sometimes modestly, sometimes catastrophically. But, says Cooper, even in “good” real estate markets, the collateral damage associated with the Dream are substantial:

The vast bulk of subsidies go to the rich. Restricting the supply of housing increases the cost of renting. Homeownership curbs geographic mobility, which has also been shown to discourage class mobility. In the wake of the financial crisis, millions have been stuck with an underwater mortgage. And needless to say, allowing ungodly amounts of mortgage debt to swim around the economy only tempts the financial sector to make the riskiest investments.

The collective irrationality of the Dream is typically offset by what appears to be its rationality for individuals tired of “throwing away” rent money when they could be building equity. But as John Aziz argues in a more recent column for The Week, it doesn’t necessarily make sense for individuals, either:

Even if the housing subsidies don’t stop — and with the mortgage industry, realtors, and homeowners all benefiting from them, they probably won’t stop anytime soon — I’d urge people looking at a mortgage to consider building up capital to buy a house through productive investments, instead of taking on a mortgage that might lead to their having their investment repossessed.

But as Cooper suggests, albeit with great frustration, the Dream of Homeownership is a cultural as much as an economic phenomenon. Back when I used to do rural development work in Georgia, I was fascinated by the fact that homeownership rates in poor rural areas were significantly higher than in cities or even suburbs. Perhaps, I thought, this was the result of poor availability of rental housing. But a few years later, while living in a southern rural area, I began to notice something about my largely impecunious neighbors: it was very common for them to use whatever small assets they could scrape up to buy a plot of land and then live on it in an inexpensive mobile home until such time (if ever) they could build a house. I’m reasonably sure most of them preferred that strategy to one of just renting a house until they could afford to buy one. I used to call this “southern land mysticism,” but it’s probably a more deeply rooted sentiment than can be confined by any region. Perhaps the evolutionary biologists would tell us it’s a hangover from the many centuries in which nearly all human beings were forced to scratch a living from the soil, and owning that soil often meant survival.

You can argue all day long that the Dream is a circular trap in which a strong cultural and economic bias towards homeownership leads to reduced demand for rental housing, which in turn reduces its supply, further marginalizing the despised class of renters. You can see this dynamic in action in any suburban subdivision where a real estate panic sets in when owners start renting out their property. But in any event, dispelling the Dream is not something that can be accomplished by tweaking the tax laws to kill the most blatant subsidies, even if that were remotely possible.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.