[Real estate should be treated as consumption, not investment.]
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THE HOMEOWNERSHIP SOCIETY WAS A MISTAKE  
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Jerusalem Demsas
December 20, 2022
The Atlantic
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_ Real estate should be treated as consumption, not investment. _

, Katie Martin / The Atlantic; Getty

 

It is a truth universally acknowledged that an American in possession
of a good fortune must be in want of a mortgage. I don’t know if you
should buy a house. Nor am I inclined to give you personal financial
advice. But I do think you should be wary of the mythos that
accompanies the American institution of homeownership, and of a
political environment that touts its advantages while ignoring its
many drawbacks.

Renting is for the young or financially irresponsible—or so they
say. Homeownership is a guarantee against a lost job, against rising
rents, against a medical emergency. It is a promise to your children
that you can pay for college or a wedding or that you can help them
one day join you in the vaunted halls of the ownership society. In
America, homeownership is not just owning a dwelling and the land it
resides on; it is a piggy bank, where the bottom 50 percent of the
country (by wealth distribution) stores most of its wealth
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And it is not a natural market phenomenon. It is propped up by
numerous government interventions, including the 30-year fixed-rate
mortgage. America has put a lot of weight on this one institution’s
shoulders. Too much.

The consensus that homeownership is preferable to renting obscures
quite a few rotten truths: about when homeownership doesn’t work
out, about whom it doesn’t work out for, and that its gains for some
are predicated on losses for others. Speaking in averages masks the
heterogeneity of the homeownership experience. For many people,
homeownership is a largely beneficial enterprise, but for others,
particularly young, middle-income and low-income families as well as
Black people, it can be risky. This critique isn’t new (not even at
this magazine
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in fact way back in 1945, the sociologist John Dean summed up many of
my concerns in this quote
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from his book _Homeownership: Is It Sound?_: “For _some_ families
_some_ houses represent wise buys, but a culture and real estate
industry that give blanket endorsement to ownership fail to indicate
_which_ families and _which_ houses.” This is my central critique:
At the margin, pushing more people into homeownership actually
undermines our ability to improve housing outcomes for all, and
crucially, it doesn’t even consistently deliver on ownership’s
core promise of providing financial security.

LUCK ISN’T AN INVESTMENT STRATEGY

As the economist Joe Cortright explained
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for the website City Observatory, housing is a good investment “if
you buy at the right time, buy in the right place, get a fair deal on
financing, and aren’t excessively vulnerable to market swings.”
This latter point is particularly important. Although higher-income
Americans may be able to weather job losses or other financial
emergencies without selling their home, many other people don’t have
that option. Wealth building through homeownership requires selling at
the right time, and research
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indicates that longer tenures in a home translate to lower returns.
But the right time to sell may not line up with the right time _for
you_ to move. “Buying low and selling high” when the asset we are
talking about is _where you live_ is pretty absurd advice. People want
to live near family, near good schools, near parks, or in
neighborhoods with the types of amenities they desire, not trade their
location like penny stocks.

A home is bound to a specific geographic location, vulnerable to local
economic and environmental shocks that could wipe out the value of the
land or the structure itself right when you need it. The economic
forces that have juiced demand to live in America’s coastal cities
are extremely strong
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but one of the pandemic’s enduring legacies may be a large-scale
shift of many workers to remote environments, thereby reducing the
value of living near the business districts of superstar cities.
Making bets on real estate is tricky business. During the 1990s,
Cleveland’s house prices outpaced
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both the national average and San Francisco’s. How confident are you
that you can predict the ways in which urban geography will shift over
your tenancy?

Timing isn’t the only external factor determining whether
homeownership “works” for Americans. Paying off a mortgage is a
form of “forced savings,” in which people save by paying for
shelter rather than consciously putting money aside. According to a
report
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by an economist at the National Association of Realtors looking at the
housing market from 2011 to 2021, however, price appreciation accounts
for roughly 86 percent of the wealth associated with owning a home.
That means almost all of the gains come not from paying down a
mortgage (money that you literally put into the home) but from rising
price tags outside of any individual homeowner’s control.

This is a key, uncomfortable point: Home values, which purportedly
built
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the
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middle class
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are predicated not on sweat equity or hard work but on luck. Home
values are mostly about the value of land, not the structure itself,
and the value of the land is largely driven by labor markets. Is
someone who bought a home in San Francisco in 1978 smarter or more
hardworking than someone trying to do so 50 years later? More
important, is this kind of random luck, which compounds over time, the
best way to organize society? The obvious answer to both of these
questions is no.

And for people for whom homeownership has paid off the most? Those
living in cities or suburbs of thriving labor markets? For them, their
home’s value is directly tied to the scarcity of housing for other
people. This system by its nature pits incumbents against newcomers.

HOUSING POLICY IS BUILT ON A CONTRADICTION

At the core of American housing policy is a secret hiding in plain
sight: Homeownership works for some because it cannot work for all. If
we want to make housing affordable for everyone, then it needs to be
cheap and widely available. And if we want that housing to act as a
wealth-building vehicle, home values have to increase significantly
over time. How do we ensure that housing is both appreciating in value
for homeowners but cheap enough for all would-be homeowners to buy in?
We can’t.

What makes this rather obvious conclusion significant is just how
common it is for policy makers to espouse both goals simultaneously.
For instance, in a statement
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last year lamenting how “inflation hurts Americans pocketbooks,”
President Joe Biden also noted that “home values are up” as a
proof point that the economic recovery was well under way. So rising
prices are bad, except when it comes to homes.

Policy makers aren’t unaware of the reality that quickly
appreciating home prices come at the cost of housing affordability. In
fact, they’ve repeatedly picked a side, despite pretending
otherwise. The homeowner’s power in American politics is unmatched.
Rich people tend to be homeowners and have an outsize voice in
politics because they are more likely to vote, donate, and engage in
the political process.

In a 2018 survey
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of a sample of America’s mayors—in which most registered serious
concerns about housing affordability—less than 25 percent of
respondents agreed with the statement “It would be better if housing
prices in my city declined.” Three years later, after skyrocketing
housing prices made a long-simmering housing crisis real for even
high-income Americans, still just 40 percent
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of participating mayors “strongly” or “somewhat” agreed with
that statement. The authors note that they found “somewhat higher
support for this position among mayors of Western cities and more
expensive cities.”

RELYING ON A SINGLE ASSET ISN’T SMART

The core benefit that homeownership is meant to offer is financial
security. Yet in numerous ways it actually _exposes_ homeowners to
more risk. By concentrating wealth in one asset, middle-class
homeowners are particularly exposed to regional economic and
environmental shocks, like if a large employer decides to relocate or
a hurricane devastates downtown. Events outside your control can
completely wipe you out. It’s no surprise then that the wealthiest
Americans are the _least likely_ to store their wealth in their homes.
Certainly, they benefit from owning their homes, but the wealthier the
American, the more likely
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they are to hold their assets in equities and mutual funds. (During
the pandemic, this difference made the rich even richer, as the stock
market outperformed
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the housing market.)

[Graph showing the percentage of wealth invested in real estate vs
other assets across income groups. The richer the group, the least
amount of wealth is invested in real estate.]
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Policy makers in favor of pushing more people into homeownership often
note that housing wealth is regularly used for socially desirable
ends, such as starting a business, retiring, or helping finance higher
education. But when I asked Zillow economists how people use their
home equity, they painted a different picture. Over the past two
years, they found that roughly 22 percent of people tapped into their
home equity, and that 70 percent of those people used it for home
improvements; 39 percent to pay off debt; 29 percent to pay for a car,
a vacation, or another costly item; and just 12 percent for college.
None of these decisions are bad, per se, but they don’t jibe with
common perceptions of how housing wealth is put to use. (Additionally,
remodeling with that wealth instead of, say, making more diversified
investments actually increases individuals’ exposure to the risks of
homeownership.) LendingTree similarly found
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that home improvement was the top reason for homeowners applying for
home-equity loans or lines of credit.

Granted, the past couple of years may have been an aberration; people
went crazy for home remodeling during the pandemic
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But even pre-pandemic research cuts against common understandings of
how homeowners use their equity. In 2011, then University of Chicago
economists Atif Mian and Amir Sufi
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how homeowners responded to rising home values and discovered that
newfound equity wasn’t used for further investment or even to pay
down expensive credit-card balances but rather largely for home
improvement or other consumption. A now-familiar trend emerged in this
research as well: Borrowing against home equity is the domain of
homeowners in relatively poor financial positions. They found that
almost 40 percent of total defaults from 2006 to 2008 were from 1997
homeowners who borrowed aggressively against the rising value of their
houses.

People also tend to underrate the hidden costs of owning a home,
including property taxes, utilities, maintenance costs, and upkeep. In
an interview
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with UC Berkeley professor Carolina Reid in 2013, a low-income
first-time homebuyer explained:

“The three months after we bought the house, we tripled our credit
card debt. We were so focused on affording the house, we didn’t
think about the moving costs. And things like buying trash cans for
the bathroom or curtains. I think I must have gone to Target every day
and walked out with $300 worth of stuff.”

INEQUALITY IS INEVITABLE

Home values do not increase uniformly, which means the gains to
homeowners differ by income, by geography, and by race. From 2010 to
2020, 71 percent of the increase in the value of owner-occupied
housing
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accumulated to high-income homeowners. The geographic distribution of
housing values may not be predictable, and is sometimes surprising,
but it isn’t necessarily random, either. Riskier areas tend to be
more affordable areas because the people who can pay to live elsewhere
will do so. That means that the riskiest investments, and thus the
worst potential outcomes for homeowners, are concentrated among people
with less wealth to begin with. These differences are inevitable;
that’s precisely why our political  obsession with homeownership as
an investment is so misguided.

A single-minded pro-homeownership agenda can lead policy makers to
ignore massive potential costs. Last year, for instance, NPR
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found that the Department of Housing and Urban Development had
offloaded foreclosed houses in federally designated flood zones on
unsuspecting buyers, many of whom were first-time homeowners. A HUD
spokesperson justified the move by explaining that the agency wanted
to ensure that “property values” were maintained in these areas,
so leaving the homes vacant was therefore unacceptable. More so than
selling people a vulnerable asset nearly certain to erode their
financial stability?

Racial disparities in housing are well-known but worth stressing. In
2018, the Brookings Institute researchers Andre M. Perry, Jonathan
Rothwell, and David Harshbarger compared homes in majority-Black
neighborhoods with communities that have very few or no Black
residents and found
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that even when controlling for “similar amenities” (school
quality, access to businesses, crime), homes in majority-Black
neighborhoods are worth 23 percent less, roughly $48,000 a home on
average and $156 billion in cumulative losses.

In his book _Know Your Price_
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explains that majority-Black neighborhoods have higher crime rates,
longer commute times, and fewer good public amenities (such as
high-scoring schools) and private ones (such as highly rated
restaurants). Although these factors, of course, affect price, they
explain only about half of the differential between Black and white
neighborhoods. The rest, Perry attributes to racism. “Value, by and
large, is socially constructed, and much of the way we have created
practices to value homes are rooted in racist belief systems,” Perry
explained to me.

Better government policy can resolve some racial inequities, but not
all. Home value is subjective. Obviously labor-market conditions and
public investments play a large role, but so do aesthetics and so do
sometimes inarticulable feelings of belonging that cannot be
quantified or explained, sometimes even to ourselves. When a
prospective buyer walks into a neighborhood and sees several Black
neighbors, no amount of government legislation can stop them from
consciously or subconsciously lowering their assessment of the
neighborhood’s value. These subjective assessments create a Black
tax on home-price appreciation: The average 2007 owner who sold in
2018 earned a .9 percent annual return while the average Black seller
earned a .4 percent return, according to research by the economist
Matthew Kahn
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Even when Black Americans do build wealth through homeownership,
downturns in the economy wipe them out. According to the Economic
Policy Institute
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from 2005 to 2009, a time period covering the foreclosure crisis,
Black households saw their median net worth fall by 53 percent, while
white households saw just a 17 percent decline. And on the flip side,
when the housing market is doing well, Black households tend to
benefit less than white ones. The Boston Fed
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estimated that from January to October 2020, as mortgage rates
plummeted, 12 percent of white, 14 percent of Asian, and 9 percent of
Hispanic borrowers refinanced their homes—whereas only 6 percent of
Black borrowers did, likely because of risk factors such as lower
credit scores. The researchers found that the savings from refinancing
totaled $5.3 billion in payment reductions a year—of which only 3.7
percent went to Black households.

One final inequality that often flies under the radar is generational
inequality. When Americans buy homes under the expectation that values
always appreciate, that’s an expectation that _someone else will pay
that increased price_. In 2018, writing for City Observatory, the
author and housing expert Daniel Kay Hertz aptly described
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homeownership as a Ponzi scheme: “It is, in other words, a massive
up-front transfer of wealth from younger people to older people, on
the implicit promise that when those young people become old, there
will be new young people willing to give them even more money. And of
course, as prices rise, the only young people able to buy into this
ponzi scheme are quite well-to-do themselves.”

undamentally, the U.S. needs to shift away from understanding housing
as an investment and toward treating it as consumption. No one expects
their TV or their car to be a store of value, let alone to appreciate.
Instead, Americans recognize that expensive purchases should reflect
their particular desires and that the cost should be worth the use
they get out of them.

Just as higher-wealth households spread their assets among various
equities and mutual funds, so should the government encourage and aid
lower- and middle-income households in doing the same. Not only would
this shift in emphasis help American families diversify risk, but it
would help them avoid many of the unavoidably unequal features of the
housing market. As the economist Nela Richardson told _Marketplace_
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“A stock in Apple is the same for everybody.” It doesn’t know
whether you are Black or white, rich or poor, and the fortunes of all
investors are tied together if the stock market does poorly, meaning
highly engaged shareholders will hold companies accountable for poor
returns or bad management decisions—a benefit that accrues to all
investors.

I should be explicit here: Policy makers should completely abandon
trying to preserve or improve property values and instead make their
focus a housing market abundant with cheap and diverse housing types
able to satisfy the needs of people at every income level and stage of
life. As such, people would move between homes as their circumstances
necessitate. Housing would stop being scarce and thus its
attractiveness as an investment would diminish greatly
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for both homeowners and larger entities. The government should
encourage and aid low-wealth households to save through diversified
index funds as it eliminates the tax benefits that pull people into
homeownership regardless of the consequences
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Right now, homeownership is the default option for most people with
savings. That’s true in part because of the perceived benefits that
I mentioned above but also because we make renting a nightmare in this
country. In order for homeownership to be a meaningful choice, tenancy
has to be one too. Part of what people are purchasing when they move
from being a tenant to an owner-occupant is freedom from landlords.

If we are interested in helping low- and middle-income people live
well, we need to fix renting. Some potential policies include
increasing oversight of the rental market
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providing tenants with a right to counsel
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in eviction court to reduce predatory filings, advancing
rent-stabilization policies
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public investment in rental-housing quality, and, most important,
building tons of new housing so that power shifts in the rental market
from landlords to tenants. Even if nothing changes and America’s
love affair with homeownership continues, tens of millions of people
will continue renting for the duration of their lives, and almost
everyone will rent for at least part of their life. Financial
security, reliable and reasonable housing payments, and freedom from
exploitation should not be the domain of homeowners.

Let housing be a home; let it provide shelter, access to good jobs,
and safe and healthy communities. Just don’t let it be an
investment.

 

Jerusalem Demsas
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writer at _The Atlantic. _

* Housing; Real estate;
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