Home Ownership Is The West’s Biggest Economic-Policy Mistake

[SIGSEGV]

Originally Posted by Investing In Chicago

Whether somebody owns a home in whatever moment of time isn't relevant, and doesn't tell the entire story.
The fact is, Home Ownership is by far the #1 wealth creator for the vast majority of Americans. If people choose not to take advantage of the benefits home ownership provides, that is on them, not cause to revamp the entire system.
With that said, home ownership is not a get rich fast scheme, it typically means you need to ride out several peaks and valley's in the market, and stay the course. There are very few instances where a family holds on to a home they own for 20+ years and says "gee, I wish I didn't purchase and pay off that home".

The barrier to moving and high transaction costs can cause huge inefficiencies, especially in high-demand locations. A family with children does not need the same size home at all stages of life, for example. Additionally many people don't stay at the same job for 20+ years which can lead to non-ideal commuting arrangements. Plus, as population growth slows, I bet average housing returns will go way down.

[Investing In Chicago]

Originally Posted by SIGSEGV

The barrier to moving and high transaction costs can cause huge inefficiencies, especially in high-demand locations. A family with children does not need the same size home at all stages of life, for example. Additionally many people don't stay at the same job for 20+ years which can lead to non-ideal commuting arrangements. Plus, as population growth slows, I bet average housing returns will go way down.

And?

[Crawford]

Originally Posted by eschaton

But it is very good at ensuring there is almost no real increase in housing costs over time, even in high-demand areas with growing populations.

For most homeowners, there is no real increase in housing costs over time. Fixed rate mortgages. This is one of the biggest arguments for homeowership. Fixed expense and forced saving.

[Crawford]

Originally Posted by Investing In Chicago

And?

There are tremendous economic and social inefficiencies if you have, say, a 10 floor NYC building with 8 residents, half of them retired. It doesn't mean we should throw them out or something, but it's something to be looked at. Policies probably shouldn't incentivize inefficiency.

And you're directly paying higher costs. For example, public housing agencies have no legal obligation to move residents when their household size decreases. So you have plenty of grannies living alone in 4 bedroom apartments while there are massive waiting lists of families doubled up or in high cost shelters waiting for said housing.

[Investing In Chicago]

Originally Posted by Crawford

There are tremendous economic and social inefficiencies if you have, say, a 10 floor NYC building with 8 residents, half of them retired. It doesn't mean we should throw them out or something, but it's something to be looked at. Policies probably shouldn't incentivize inefficiency.

And you're directly paying higher costs. For example, public housing agencies have no legal obligation to move residents when their household size decreases. So you have plenty of grannies living alone in 4 bedroom apartments while there are massive waiting lists of families doubled up or in high cost shelters waiting for said housing.

Sure, but in the case of elderly people living in a home that could be lived in by a young family, they probably are already not receiving one of the major incentives of home ownership - Mortgage Interest Tax Deduction.
Aside from removing someone from their home, all that can be done is incentivize somebody to move.

Addressing the comment I quoted, there are always individual circumstances as considerations for purchasing a home, and for many, it may not make sense to purchase. The reality is this though - Home Ownership is the #1 wealth generating vehicle for the majority of Americans, and those who participate in home ownership almost always come out ahead long term.

[eschaton]

Originally Posted by Investing In Chicago

Whether somebody owns a home in whatever moment of time isn't relevant, and doesn't tell the entire story.
The fact is, Home Ownership is by far the #1 wealth creator for the vast majority of Americans. If people choose not to take advantage of the benefits home ownership provides, that is on them, not cause to revamp the entire system.

With that said, home ownership is not a get rich fast scheme, it typically means you need to ride out several peaks and valley's in the market, and stay the course. There are very few instances where a family holds on to a home they own for 20+ years and says "gee, I wish I didn't purchase and pay off that home".

The benefits of home-ownership are in part in existence because we set up a tax system which makes it advantageous to own a home, such as by exempting proceeds of a sale of a home from capital gains. This didn't just fall down from the sky. It's not like the law of gravity. It's something we chose to do as a nation, and the benefits only exist because we decided to make it beneficial. We could always set up some sort of new incentive investment option for Americans, and that could in time easily lap past home-ownership as a wealth-generation mechanism.

There are many tradeoffs to high home ownership levels though. Many studies have found that high levels of home ownership discourage labor mobility, and indirectly result in higher unemployment.

Let's just do a thought experiment for a minute. Imagine we treated employment in this country like we treat housing. Instead of applying for a job with a company, you purchased the right to a job which you could not be fired from for any reason, which had its value determined on the open market. You could pass down the job to your children when you retired, or sell it. Would such a system be good for incumbent workers? Of course not - all of the best jobs would already have been bought up by older workers with access to more capital, and they'd have to save for years in substandard jobs in order to get access to a more plum work assignment. You'd also end up with an inefficient market where a lot of people held onto jobs they were not well suited for because they were the incumbents and couldn't be dislodged, meaning economic growth would be lower overall.

FWIW, I'm not saying that we as a culture have to actively disincentivize home ownership. Just that neutral policy which didn't favor home-ownership over rentals would probably balance the issues of both groups more evenly.

Originally Posted by Crawford

For most homeowners, there is no real increase in housing costs over time. Fixed rate mortgages. This is one of the biggest arguments for homeowership. Fixed expense and forced saving.

There are of course other ways you can deal with some of this, like rent control. Though it's worth noting that rent control results in some of the same issues as high-levels of homeownership - policy which favors long-time residents and is heavily biased against newcomers moving into a community.

[Investing In Chicago]

Originally Posted by eschaton

The benefits of home-ownership are in part in existence because we set up a tax system which makes it advantageous to own a home, such as by exempting proceeds of a sale of a home from capital gains. This didn't just fall down from the sky. It's not like the law of gravity. It's something we chose to do as a nation, and the benefits only exist because we decided to make it beneficial. We could always set up some sort of new incentive investment option for Americans, and that could in time easily lap past home-ownership as a wealth-generation mechanism.

But the incentive works - hence why millions and millions and millions of Americans own homes, and make significant amounts of money off their investment. This isn't something only available to the rich.

Originally Posted by eschaton

FWIW, I'm not saying that we as a culture have to actively disincentivize home ownership. Just that neutral policy which didn't favor home-ownership over rentals would probably balance the issues of both groups more evenly.



There are of course other ways you can deal with some of this, like rent control. Though it's worth noting that rent control results in some of the same issues as high-levels of homeownership - policy which favors long-time residents and is heavily biased against newcomers moving into a community.

Why the need to disincentivize? Home ownership the #1 wealth creating vehicle for the vast majority of Americans? How is that a bad thing?

[eschaton]

Originally Posted by Investing In Chicago

But the incentive works - hence why millions and millions and millions of Americans own homes, and make significant amounts of money off their investment. This isn't something only available to the rich.

Why the need to disincentivize? Home ownership the #1 wealth creating vehicle for the vast majority of Americans? How is that a bad thing?

Did you see my link regarding how high rates of home ownership lead to lower worker mobility and higher unemployment? There's lots of links. Here's another one:

Our story is hardly unique. In one of the most telling studies looking at the benefits of home ownership, economists Andrew Oswald and David Blanchflower ask, "does high home-ownership impair the labor market?"

Their answer is "yes."

Looking at regional data since 1980, the pair found that "A doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate." That's simply massive.

The study makes clear that homeowners don't necessarily have higher rates of unemployment. Instead -- and this is really important -- they conclude that high rates of homeownership affect the entire labor market through lower rates of productivity and entrepreneurship.

Regions with higher home ownership created fewer new businesses, had longer commute times, and lower rates of labor mobility. All three impose costs on the labor market, and eventually lead to overall lower rates of employment. Importantly, the results aren't dependent on the years surrounding the housing crash, when millions of Americans became underwater on their mortgage. This is a deeply seeded trend.

The study controls for characteristics like age and education, but the authors caution against reading too deeply. The results are what they are, but correlation doesn't necessarily mean causation. "We are unable, in this paper, to say exactly why, or to give a complete explanation for the patterns that are found, but our study's results are consistent with the unusual idea that the housing market can create dampening externalities upon the labor market and the economy," they write.

In addition, some people are - frankly speaking - just not equipped to be homeowners anyway. One of the big issues with programs which provide special support to allow low-income people to become homeowners is they don't have the capital needed to maintain their homes, meaning eventually through deferred maintenance home value will be destroyed. This also extends to elderly people, as I mentioned.

[JManc]

Originally Posted by Investing In Chicago

Why the need to disincentivize? Home ownership the #1 wealth creating vehicle for the vast majority of Americans? How is that a bad thing?

It's not but we also should not push everyone into home ownership because it's not for everyone. Far too many people get snowed under on a house and mortgage they had no business getting. People seem to think they have to have a house because it is the ultimate measure of success. At least in this country.

[Baronvonellis]

When you think about it, buying and holding stock and mutual funds long term is a much better deal than buying a house with a 30 year mortgage. If your buying a $300k house, and have a 20% downpayment of $60k and instead invest that $60k in a index mutual fund and don't add any other money again, in 15 years at 12% average return you would have $328k and then could buy a house with cash. You just saved yourself 15 years of interest payments to a bank. Or better yet leave it for the normal 30 year mortgage period. Then you would have $1.8 million in the bank, and could buy a much nicer house, and still have a million in the bank.

Meanwhile Joe homeowner, has been paying lots of maintenance and upkeep every year on a depreciating asset, that you can't move with you if you have to get another job in another location. Anytime you have to buy or sell a house you have to pay realtors fees and closing costs, its not a liquid asset like stock. With stock you can sell it immediately at $0 cost. Being house rich and money poor isn't always that great. Say you need some money for an emergency expense? Well then just sell off some stock yourself from your pile of stock. No need to take out a loan from a bank and pay interest back to the bank for your own wealth. Pay back yourself at your own time with 0% interest. In the end you'll still own a house paid off with alot more real wealth to show for it, with no stress of having to fix a house all those years, paying property taxes, insurance ect. While having flexibility to move any year, liquid assets you can use at any time in an emergency.

[Jonesy55]

Originally Posted by Baronvonellis

If your buying a $300k house, and have a 20% downpayment of $60k and instead invest that $60k in a index mutual fund and don't add any other money again, in 15 years at 12% average return you would have $328k and then could buy a house with cash. You just saved yourself 15 years of interest payments to a bank.

But that $300k house in year 1 is probably going to cost a lot more than $328k in year 15.

Plus you would have to pay 15 years worth of rent which the homeowner wouldn't need to pay.

And that's assuming you can get 12% annual returns over 15 years, which might be a bit optimistic.

[Investing In Chicago]

Originally Posted by Baronvonellis

When you think about it, buying and holding stock and mutual funds long term is a much better deal than buying a house with a 30 year mortgage. If your buying a $300k house, and have a 20% downpayment of $60k and instead invest that $60k in a index mutual fund and don't add any other money again, in 15 years at 12% average return you would have $328k and then could buy a house with cash. You just saved yourself 15 years of interest payments to a bank. Or better yet leave it for the normal 30 year mortgage period. Then you would have $1.8 million in the bank, and could buy a much nicer house, and still have a million in the bank.

Meanwhile Joe homeowner, has been paying lots of maintenance and upkeep every year on a depreciating asset, that you can't move with you if you have to get another job in another location. Anytime you have to buy or sell a house you have to pay realtors fees and closing costs, its not a liquid asset like stock. With stock you can sell it immediately at $0 cost. Being house rich and money poor isn't always that great. Say you need some money for an emergency expense? Well then just sell off some stock yourself from your pile of stock. No need to take out a loan from a bank and pay interest back to the bank for your own wealth. Pay back yourself at your own time with 0% interest. In the end you'll still own a house paid off with alot more real wealth to show for it, with no stress of having to fix a house all those years, paying property taxes, insurance ect. While having flexibility to move any year, liquid assets you can use at any time in an emergency.

You're also the poster who has my award of dumbest post in the history of the internet by suggesting banks should be able to, legally, increase the principle of a loan based on equity gained in the home.

To address your post: It isn't a zero sum game, invest in the home and the market, it's all about diversification. How can you possibly not understand this.

Using your leverage to purchase a home is far smarter than paying cash, you're also ignoring all of the tax benefits associated with owning a home.

Additionally, it's tough to average 12% gains in the market over a significant period of time. Both investments in the market and home ownership should be looked at through a very long term lens.

Your advise is just plain stupid, to be blunt.

[kingkirbythe....]

This thread is so triggered.

[Gantz]

Originally Posted by Crawford

There are tremendous economic and social inefficiencies if you have, say, a 10 floor NYC building with 8 residents, half of them retired. It doesn't mean we should throw them out or something, but it's something to be looked at. Policies probably shouldn't incentivize inefficiency.

And you're directly paying higher costs. For example, public housing agencies have no legal obligation to move residents when their household size decreases. So you have plenty of grannies living alone in 4 bedroom apartments while there are massive waiting lists of families doubled up or in high cost shelters waiting for said housing.

The reason this happens in NYC is due to rent regulation/tenant protections. If you "scored" one of those rent regulated apartments, you end up suffering pretty much your whole life, because now you are trapped in one of the most expensive cities with no ability to move, even though you are renting. Rent stabilization is the worst of both worlds - you are still renting and don't get the benefits of owning a home and you don't have the mobility associated with renting. The only people who should be rent stabilized are the elderly, who don't need job mobility.
The real answer is of course simple - just build more housing. Also, the largest homeowners here are not the ones restricting development and driving up their "assets". The largest homeowners here are big real estate companies or REITs, and they are all pro-development. They will make more money developing new houses than sitting on existing houses they own. So they don't need to "protect" or "drive up value" of their real estate holdings, they create more value by building. You have a city where 70% of people rent, yet those same people are also against any new apartment construction, so they are driving up the costs of existing scarce inventory. Talk about economic illiteracy.

[iheartthed]

Originally Posted by Gantz

The reason this happens in NYC is due to rent regulation/tenant protections. If you "scored" one of those rent regulated apartments, you end up suffering pretty much your whole life, because now you are trapped in one of the most expensive cities with no ability to move, even though you are renting. Rent stabilization is the worst of both worlds - you are still renting and don't get the benefits of owning a home and you don't have the mobility associated with renting. The only people who should be rent stabilized are the elderly, who don't need job mobility.

Why wouldn't a rent stabilized tenant have the same mobility as non-rent stabilized? The vast majority of renters in NYC live in rent-stabilized units. The renters who don't live in rent-stabilized units probably live in a building owned by one of those multi-property companies like Avalon, where they hike your rent by 1/4th every year until you can't afford it anymore. Then the rate gets reset to market for the next tenant.

[Crawford]

Originally Posted by iheartthed

Why wouldn't a rent stabilized tenant have the same mobility as non-rent stabilized?

Because they're in non-market housing, and have a deal, so no incentive to move. I mean, this isn't conjecture, we have data on rent stabilized vs. market rate, and rent stablized basically never move.

That's how you have grannies with 70 years in the same West Village rental building. In a "normal" market that would never happen. Renting is supposed to be temporary.

[iheartthed]

Originally Posted by Crawford

Because they're in non-market housing, and have a deal, so no incentive to move. I mean, this isn't conjecture, we have data on rent stabilized vs. market rate, and rent stablized basically never move.

A minority of the actual units for rent in New York are un-stabilized. Even many of the new construction buildings are rent stabilized. It also takes a very long time for a rent stabilized unit to be significantly below market rate.

[JManc]

Originally Posted by Baronvonellis

When you think about it, buying and holding stock and mutual funds long term is a much better deal than buying a house with a 30 year mortgage. If your buying a $300k house, and have a 20% downpayment of $60k and instead invest that $60k in a index mutual fund and don't add any other money again, in 15 years at 12% average return you would have $328k and then could buy a house with cash. You just saved yourself 15 years of interest payments to a bank. Or better yet leave it for the normal 30 year mortgage period. Then you would have $1.8 million in the bank, and could buy a much nicer house, and still have a million in the bank.

Meanwhile Joe homeowner, has been paying lots of maintenance and upkeep every year on a depreciating asset, that you can't move with you if you have to get another job in another location. Anytime you have to buy or sell a house you have to pay realtors fees and closing costs, its not a liquid asset like stock. With stock you can sell it immediately at $0 cost. Being house rich and money poor isn't always that great. Say you need some money for an emergency expense? Well then just sell off some stock yourself from your pile of stock. No need to take out a loan from a bank and pay interest back to the bank for your own wealth. Pay back yourself at your own time with 0% interest. In the end you'll still own a house paid off with alot more real wealth to show for it, with no stress of having to fix a house all those years, paying property taxes, insurance ect. While having flexibility to move any year, liquid assets you can use at any time in an emergency.

You have to live somewhere and with renting, there's no equity. Even if real estate is less lucrative in the long run than an index fund, you're still investing in your home where as renting is a sunk cost never to be recovered. It acts as a stable component of ones portfolio.

[aaron38]

Originally Posted by Crawford

And you're directly paying higher costs. For example, public housing agencies have no legal obligation to move residents when their household size decreases. So you have plenty of grannies living alone in 4 bedroom apartments while there are massive waiting lists of families doubled up or in high cost shelters waiting for said housing.

Flip the problem around. Instead of punishing seniors for "living too long" and "taking up space", to get them to move, give them an incentive.
Offer free moving services. Many seniors would probably agree to downsize if the work was done for them.
Moving almost killed me when I was 42, trying to do all the packing myself. At 75, screw it, I'm dying in my home.

[Steely Dan]

Originally Posted by JManc

You have to live somewhere and with renting, there's no equity. Even if real estate is less lucrative in the long run than an index fund, you're still investing in your home where as renting is a sunk cost never to be recovered. It acts as a stable component of ones portfolio.

that's why home ownership can be viewed as a kind of "savings account for idiots".

it's not that home ownership is the absolute best possible investment that anyone can ever make, it's just that you gotta live somewhere, so if you can get over the down payment hump, then you're basically writing a portion of your "rent" check to yourself every month, instead of pissing all of that money away forever.

combine that with the other incentives that our society gives to home ownership, and it's a pretty good way to end up with many hundreds of thousands of dollars in the "bank" after several decades without having to do a whole lot.

and it's good protection against inflation, to boot.

Originally Posted by Baronvonellis

Being house rich and money poor isn't always that great.

well, of course that specific situation isn't great, but the savvy home owner buys a home at a price point that still allows them to have some extra cash to diversify their investments.

being way over-extended in any one specific investment is never a wise choice.