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What's so Great About Home Ownership?
Thanatos
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Registered User regular
We were discussing this briefly in the Occupy Wall Street thread, but I think it's probably worthy of its own thread. So, what I'm asking is what is so awesome about home ownership? And I'm not really referencing this from an individual level, but from a societal level; obviously, for a lot of people, home ownership is great. What I'm asking is why do we, as a society, want to encourage people to be homeowners?
I'm going to admit to some ignorance as to how, exactly, a lot of these things work, but I hope that people who know more than I do will step in and fill in some of the details and add additional programs that I'm not aware of. So, what does the government do to encourage home ownership?
1) And this is the biggie: interest on the mortgage for your home is tax-deductible, on up to $1,000,000 worth of debt. This is a subsidy to the tune of $100 billion per year.
2) The FHA, at no profit, insures mortgages. Previously, this agency was self-funded, but since it hasn't been operating at a profit, in recent years, it has been financially fucked; estimates put its deficit over the next three years in the $500,000,000+ range. This means that the banks are making the loans, but the government is covering the risk, at no additional cost to the banks.
So, what's the problem with encouraging people to own their own homes? Well, subsidies like these distort the market. They allow banks to charge additional interest, since the banks know you'll be writing off the interest on your taxes. They drive up housing prices, by making it accessible to more people. And they allow banks to give mortgages to people they really shouldn't be, using programs like interest-only or adjustable-rate mortgages.
Now, I'm not saying that owning a home is bad, per se; I'm saying that we shouldn't be spending a metric fuckton of tax money to encourage people to buy homes in developments an hour from where they work, in areas with no bus service. I'm also saying that we shouldn't be encouraging the creation of bubbles like the real estate one; instead of that, let's encourage people to open other businesses, or restrict our subsidies to higher-density housing, like condos.
I'm going to admit to some ignorance as to how, exactly, a lot of these things work, but I hope that people who know more than I do will step in and fill in some of the details and add additional programs that I'm not aware of. So, what does the government do to encourage home ownership?
1) And this is the biggie: interest on the mortgage for your home is tax-deductible, on up to $1,000,000 worth of debt. This is a subsidy to the tune of $100 billion per year.
2) The FHA, at no profit, insures mortgages. Previously, this agency was self-funded, but since it hasn't been operating at a profit, in recent years, it has been financially fucked; estimates put its deficit over the next three years in the $500,000,000+ range. This means that the banks are making the loans, but the government is covering the risk, at no additional cost to the banks.
So, what's the problem with encouraging people to own their own homes? Well, subsidies like these distort the market. They allow banks to charge additional interest, since the banks know you'll be writing off the interest on your taxes. They drive up housing prices, by making it accessible to more people. And they allow banks to give mortgages to people they really shouldn't be, using programs like interest-only or adjustable-rate mortgages.
Now, I'm not saying that owning a home is bad, per se; I'm saying that we shouldn't be spending a metric fuckton of tax money to encourage people to buy homes in developments an hour from where they work, in areas with no bus service. I'm also saying that we shouldn't be encouraging the creation of bubbles like the real estate one; instead of that, let's encourage people to open other businesses, or restrict our subsidies to higher-density housing, like condos.
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I didn't know that. Huh. Good thing I haven't made a move to become a home-owner yet I guess.
This is a field of finance that I have zero knowledge on, as you can see. All I can say at the moment is that I don't think people think about property tax or cost of upkeep when it comes to home-ownership.
But, I also figure a significant reason why these policies exist, is because it's the american dream...because it's the american dream. Maybe because of TV, I don't know.
I disagree with the second home part, but why should we limit this to condominiums? If you disagree with the $1M limit, that's one thing, but why should the construction and location of the home matter?
[e] I see home-ownership as a way for people to actually save money in a country of people who are shit at saving money. If you buy a house, you might be paying more than you would in rent, but long term you're actually contributing to your retirement and increasing your purchasing power. More purchasing power makes you a factor in increasing demand, more demand makes for a better economy.
Rigorous Scholarship
Leads to or correlates with? This is an important distinction.
There's not an easy way to pre-calculate cost of ownership when you buy a house, but I don't know anyone who owns a house who went into it without ever considering the fact that they're going to have to caulk everything periodically or fix things when they break. And nobody buys a house without thinking about property taxes. If you have a mortgage then your lender either requires or offers an escrow service for property taxes, such that you pay into your tax escrow account every month as part of your mortgage payment and, at tax time, the lender pays out your taxes from the escrow account. Terms vary, but if your taxes end up being more or less than anticipated at the start of the year the excess/short-fall may be passed on to your as a check/bill or may be rolled into the next year's payments as a lower/higher monthly mortgage payment.
As for what's good about home ownership and why the government subsidizes it:
* Owning a home is good for the local economy. Not only does home construction create jobs in various fields (construction, design, architecture, landscaping, real estate sales, etc.) but it provides revenue for local suppliers of construction goods and, after the house is built and sold, encourages the buyer to stay in and invest in the community to protect their investment. Someone who buys a house this year is more likely to still be in the area 5 years from now, spending money and paying local taxes, than someone who rents. Many areas require home owners' associations for new developments, as well, which are their own special brand of evil but do encourage neighborhood upkeep to keep property values high.
* Owning a home is part of the American Dream. Whether it should be or not is another matter, but it's something that we're culturally conditioned to think we should want. Being a government nominally of, by, and for the people it makes sense that we would support our citizens fulfilling our national fantasies.
* America is big as shit, geographically, and only in the last few decades have concerns about transportation costs or the environmental impact of transportation become a thing. Growing outward from urban centers into lower-density suburban living is bad environmentally, but is pretty good economically, and every part of the country has a shit ton of room to grow out into. Even our densest urban centers are surrounded by miles and miles of sprawl that's, in almost all cases, not very well serviced by public transit. After generations of suburban sprawl, it's going to take more than a decade or two to convince America At Large that everyone living in high-rise apartments and taking the bus is really preferable. Not to mention a lot of money spent on urban renewal, re-design, and development to make it possible for everyone to crowd in on the center.
* Home ownership is an investment. People are getting more mobile nowadays, but for most of US history people have spent the majority of their life living in, at most, a couple of places. If you're going to stay in one place for 20 years or more then it is absolutely insane to spend that entire time throwing your money away on rentals instead of buying a home. Even if your property values drop, there's a real-estate market collapse, and you end up selling your home for less than you paid in the first place, that's a less than 100% loss, which is what you're looking at with rental. Considering what a spectacular idea it is to buy instead of rent, financially, if you can afford it and aren't planning on going anywhere, it seems reasonable that the government would want to help people make it happen.
In English this means: They tend to ignore market swings better than other investments, they're always worth something, and their value tends to appreciate at parity with inflation (at least).
With rates at historic so-low-it's-practically-free-financing lows, now is a great time to buy a home.
If you have two brain cells to rub together you do. And if you do an escrow account with your mortgage company you pay your property taxes over time as a portion of your mortgage payment. That's a pretty popular option for people as they'd rather pay a little bit at a time than be coughing up a huge check every year.
Rigorous Scholarship
Lacking any data to back it up, I'd say leads to. Think about it: if you own a home somewhere then you're basically locked into living there. When your neighborhood starts going downhill and you own your house, you have a good reason to work to oppose whatever is causing the area to get shittier. If you rent then the solution is to just move, rather than volounteering for, donating to, or organizing programs to fix what's wrong.
I go on active duty, and I'm not even buying a car until I've paid off all college debt as hard and as fast as possible. I will drive my old Honda Accord until it blows up. Which it won't because it's a Honda and they are immortal.
With a divorce rate of a million percent and the recession, I can't fathom ever owning a home.
I'd be okay with it, maybe, though it'd have to be a really nice skyscraper and I'd be sad about not having my dogs anymore. But yeah, I don't think there exists an argument that will convince all of America that dense urban living is better than what we have. If it ever happens it will be because we have no other choice.
Yard, ugh. I just wanted a buffer between myself and my neighbors. I might be happier if I could replace my yard with a moat, but then I'd have to shell out extra for chlorine or risk attracting one of these.
I also like to do outdoorsy things. Being able to go 2 hours and do it is a hell of a thing instead of having to make a fucking week out of it. While people like Thanatos may enjoy that style of life (he may not actually just doesn't see the financial sense of it), very few people actually like this. There's also a reason like to get away from the hustle and bustle of city life too.
Instead of encouraging suburban lifestyle and sprawl, you'd be okay with people owning 2 houses as a de facto thing?
However, Thanatos your basic concept of this is flawed, and the flaw is pretty easy to spot: We aren't spending any tax money on mortgage interest deductions. We're collecting less money - this is not spending.
Also: I'm no economist, but is it actually true that "the banks" jack up the mortgage interest because they know you'll be writing it off? I've never read anything to suggest this is a thing that happens in the real world.
Double also: I agree that we shouldn't be encouraging real estate bubbles, but isn't it the liberal party line that nothing government did contributed to the bubble?
Triple also! Why is subsidizing a home bad, but subsidizing a condo good?
The homeowners are always "but you are wasting money by renting!" but fail to realize that they have recurring costs as well that are factored into my recurring rent. School tax, property tax, and utility bills are going to happen regardless. And they're significant. Oh, and that money I didn't pay on a down-payment? Yeah, it can be invested into whatever the fuck I want, often without having to follow the housing market. I think we made a conclusion in a previous thread that home ownership was essentially a forced investment, where the collateral is your shelter. I don't want my investment to be my shelter.
I am also not restricted in the real estate market, so I'm free to pick up and move when my career/family mandates it. I am restricted by a lease, though. I guess you could make the argument that if you could buy/sell a home really fast, then it provides more freedom than a lease.
Let 'em eat fucking pineapples!
It's kind of a self-fulfilling prophecy, because lack of consumer spending is keeping the economy in stagnation mode.
I'm guessing you don't have kids and aren't old or disabled.
Rigorous Scholarship
It's completely dependent on the market. For instance, in my specific case because renting is more expensive than housing, owning pays off within 1.5 years. On average, for most areas, that does indeed work out between 5-10 years though.
If I had to use anecdotal data, people stop moving around every few years after the age of 30, coinciding with family life. Apartments are terrible. I hate landlords and I hate dealing with the inconvenience of things like multiple yearly inspections, shared walls (ugh), shared laundry rooms + common areas (again ugh sometimes people do nasty things), layover with repairs and improvements. The city life is not something I enjoy dealing with. Even dealing with something so much as burying a pet is a nice thing to have.
The mortgage represents a massive debt and a constant drain on your funds. The mortgage certainly does not help stability. Owning the home outright, however, should help quite a bit, and the mortgage is a means to that end.
The flip side of the coin is that people are no longer spending money for the sake of spending money, and that the previous levels of spending were unsustainable. People are now realizing they don't need a 3000 sq ft house, a $50,000 wedding, or a $100,000 luxury car.
Personally I'm only going to buy a house when I have kids. And even then, it will be a bare minimum of space. And I'll probably have to relocate somewhere cheaper than I'm at now. Northern VA home prices are obscene. $500,000 for a townhouse. A single family home can easily go for $1,000,000. That is unless you want a 2 hour commute each way. The one friend I have here who bought almost instantly regretted it. At first he was excited at how much lower his mortgage was than my rent. Then he was dismayed at how the constant repairs and things going wrong devoured his life's savings. Oops.
Which, if you're paying for rent, you're probably paying roughly equivocal either way. One is an obligation tied to assets, the other is just a hole. Sure there's a buffer of "I'm not technically on the hook." But you'd be kidding yourself if you think being homeless or living in shack in a shitty part of town is a good idea.
And I'm willing to pay a premium (if it exists) to not have to listen my neighbors fucking or being woken up at 2 am because the guy upstairs decided to have a dance party with his subwoofer cranked to 11. :P
The people who could afford those before are still doing those things.
Recurring upkeep costs are a miniscule fraction of the overall amount that a house costs you. The lion's share of what you spend goes to paying off the mortgage principle and interest and on paying property taxes. Rental prices are roughly on par with, or above, monthly mortgage payments for similar quality and size living spaces, so if I buy a house and pay $x a month while you rent for $x a month and even 1/10th of my $x goes toward the principle on my mortgage such that, after N years, I can sell my house for even 1/10th of its value, returning me 1/100th of what I paid, I get $(12Nx)/100 back (which is wildly lower than any reasonable expectation). If you move out of your rental property after those N years, you get $0 back. Yeah, you can invest your down payment in something else, but the likelihood that I'm going to get less back on selling my house than my down payment is down around zero percent.
Also... how in the world could you say that a massive debt, attached to a physical object you can't move from the spot where it's located, doesn't encourage stability? You're far more likely to stay in one spot if your only major investment can't come with you.
@VeritasVR Once you have kids, it really won't be the home that causes you to want to stay in one place. The idea that you are free to pick up and move your family as the career winds blow you is mostly false. Uprooting school-age kids is not easy or trivial, and adversely impacts them every time you do it.
You can rent a house.
Also, live in a better apartment complex...?
Let 'em eat fucking pineapples!
"Recurring" = Property taxes. Both renters and owners pay them. Renters in the form of more rent, and owners in the form of property tax. This is significant.
The logical statement is not as easy as
if $Renting > $Buying, then Buy.
Like I said, you need to be aware of home improvements and preventative maintenance, which is both time and money that could be anywhere from nothing to every dollar ever. Renting removes that variable.
Also, have you seen typical 20-year returns from the stock or bond market?
Perhaps not. I am in the military, so I don't have a choice... kids or no kids. However, bringing an emotional consideration into this discussion isn't exactly germaine to the financial questions here, especially when that financial decision is insanely complex to begin with.
Let 'em eat fucking pineapples!
I lived in a pretty nice complex - or at least they thought it was nice judging by the rent, and it was way better than the place I lived in in college when the people downstairs were selling weed out of their apartment.
Also, you can take out a home equity loan and deduct up interest paid on the first $100,000 of debt
In one sense, this is the most certain result of home ownership. We've gone over various forms of investment in several of my courses, and the amount of money you typically end up with after selling a house you've lived in for some time is at least several tens of thousands of dollars more than what you'd have from just dropping that money in conservative/safe stocks and mutual funds. This is however, dependent on the owner not getting a horrible mortgage and not selling in a down year (or years). In the normal course of affairs, it's a relatively safe and easy way to invest money and also get a number of tangible benefits at the same time.
Equity. For most Americans, home equity is the single biggest item in an individual's net worth. For a fairly substantial portion of our population, it's an individual's only source of net worth.
Do I agree that we've encouraged homeownership in a stupid way? Yes. Do I agree that the FHA and mortgage interest deductions artificially inflate home prices? Categorical yes to the FHA, partially to mortgage interest deductions. Deductible interest payments play a role, but before you can make the deduction, you have to physically possess the money in order to pay it to the bank, which helps put a brake on runaway prices fueled by mortgage deductions because what you're capable of paying is governed ultimately by your income.
The bigger issue in home price inflation is the low Fed interest rate. Because financial institutions can borrow essentially as much as they want for almost no cost, they can dump a nearly unlimited amount of money into the housing market through mortgages issued. And because, as you noted, the FHA insures those loans at no cost, there's no incentive for them not to go right ahead and do that. The more money a bank loans, the more money they stand to make back, but if any of their homeowners default, that ultimately ends up being the problem of the FHA and whomever happens to own the mortgage at the time (since most of the banks making the mortgage sell it within 24 hours).
Another side issue which I think we should correct is that housing prices are not factored into the Consumer Price Index (CPI), one of the two primary indices for inflation. That's ridiculously stupid: whether you're a homeowner or you rent, housing is almost undoubtedly your single biggest monthly expenditure. Why the fuck do we go to the effort of hiding your single biggest monthly expenditure from the books when we calculate the rate of inflation? I would suggest that if we had included housing prices in the CPI previously, alarm bells would have been going off well before the housing market collapsed in 2008, and indeed the market might never have made it to the point of collapse because the Fed would have freaked out about the rate of inflation and raised interest rates.
You sure can. It's also wayyyyyy more expensive to rent a house than to even rent an apartment, which is usually at or more than a mortgage cost itself.
Also, lol.
Yeah, this is a thing. Renting is vaguely like taking out insurance - you pay in to mitigate your personal risk.
Having grown up in a home in the woods (which can put some crazy wear and tear into a house), I spent huge amounts of my youth helping to repair the place, even though it was very well-built for its time, and was always well-maintained. Not to mention the (very) large yard, which ate up almost every single weekend I ever had.
Apartment living, at least when I have a large enough apartment, has proven much less time-consuming.
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It's also worth remembering that, historically, land ownership was required to VOTE. We have that right now, but some may consider renters to be only partial citizens.
The most likely case is that the costs will be significantly closer to nothing than to every dollar ever. I mean, you can choose to sink a shit ton of money into home improvement, but that's entirely up to you and has relatively little to do with home ownership in the broad.
I'm still not seeing how any of this counters the argument that "some non-zero return on my monthly housing expense" is better than "no return on my monthly housing expense". Yeah, you can make a lot of money in 20 years on the stock market, but you could also lose all of your money in 20 years on the stock market. And considering that you could, until recently, (and, in some rare occasions, still can) purchase a house for closer to or at zero percent down, that's not a terribly compelling argument either.
I only refer to the debt itself. You said 'encourage stability,' I said 'help stability,' and by that I meant a massive debt is not inherently stabilizing.
Owing someone $100,000 does not make your situation more stable, though it should encourage you to get stable, and quickly.
Zeeny was making the claim that owning a home with a mortgage doesn't make you more stable. I was simply allowing that he had a point in that the mortgage aspect of it was not ideal; but did not mean to imply that renting was financially preferable.
The return only comes if you think you will be there for the many years it takes to pay off the mortgage and aren't going to want to leave the house for those years.