Should Uncle Sam really be subsidizing the American Dream?
Being the dream should maybe be incentive enough
It may sound like heresy to some in the industry, but Catherine Rampell has a point in the Washington Post today – a home is not a good investment.
Calm down. That comes with a caveat – it’s not a good investment as an investment.
Catherine even quotes the highly regarded economist Robert Shiller:
The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. Don’t take my word for it; ask Robert Shiller , winner of the 2013 Nobel Prize in economics who previously became a household name for identifying the housing bubble.
“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,” he told me. “And technological progress keeps bringing the cost of construction down.” Meaning your worn, old-fashioned home is competing with new, relatively inexpensive ones.
Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5%.
Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.
So yes, a home is a lousy investment in terms of returns next to other types of investments.
Rampell fails to mention, though, that if someone isn’t paying a mortgage, that same amount of money – or even more since renting is now more expensive than buying – is thrown away on rent regardless, unless you plan to live in a van down by the river.
But Rampell does have a point – the constant drumbeat of the voices that housing prices should, in perpetuity, continue to rise and at a rate faster than inflation is irrational on the face of it.
Homeownership makes sense because it makes sense, with a few markets being the exception. Its value is self-evident not as an investment vehicle, but because 1) you won’t live long without shelter and 2) because unless you expect to be extremely transient, you build equity.
Rampell rightly wonders why we spend so much effort pushing homeownership. If it’s the American Dream, does it really need government subsidies?
The tax code, alongside other public policy, forcefully nudges Americans toward investing in housing, too. The biggest bogeyman is the home-mortgage interest deduction. But the government effectively subsidizes home-buying in other ways, including through the Federal Housing Administration, Fannie Mae and Freddie Mac, and the fact that we don’t tax imputed rents — the estimated amount homeowners would have to spend to rent an identical property.
The problem is that, perhaps because of tax incentives and ignorance about the financial returns from real estate investments, Americans are buying more house than they need or, in some cases, derive pleasure from. … If nothing else, the recent financial crisis should have taught us that it’s not in the country’s best interest to enable every aspiring homeowner to buy.
Considering the growing affordability gap in housing, that does raise the question of what kind of “affordable housing mandate” the various GSEs and housing agencies should follow. (And it’s why Mel Watt at FHFA needs to start speaking up one way or another.)
She also makes a bold stand on GSE reform few others have.
As senators mark up legislation next week that would wind down Fannie and Freddie, expect great hue and cry about whether an overhaul of the mortgage system would make homeownership less affordable. But given the many other subsidies that exist, and Americans’ persistent misperceptions about the financial benefits of buying a house, maybe we can afford to make homeownership slightly less affordable.
Of course, Jim Geraghty at the National Review takes Rambell’s core assertion and says it raises questions of its own.
Geraghty cites Rambell’s statement: “If nothing else, the recent financial crisis should have taught us that it’s not in the country’s best interest to enable every aspiring homeowner to buy.”
Rampell’s seemingly commonsense statement offers dramatic ramifications for the role of the federal government. If, because of the huge unintended consequences that attend it, it’s not in the country’s best interest to enable every aspiring American to buy a home . . . how many other areas of modern American life feature the government “enabling” people — read, distributing money — to pursue dreams that are not, in fact, in the country’s best interest?
Something to ponder.