Saturday, March 21, 2009

Homeownership: Overrated and Possibly Harmful

From "Rethinking Rent: Maybe We Should Stop Trying To Be a Nation of Homeowners" in today's Boston Globe

Despite the housing crisis, one deeply entrenched value remains sacrosanct: homeownership.

But a growing chorus of economists and housing experts say that this mind-set needs fundamental reform. Owning a home is not right for everyone, they say: In some ways it's overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be.

Widespread homeownership may also have a negative impact on the economy, because, among other reasons, displaced workers can't easily relocate to new jobs. And some of the alleged rewards of homeownership, such as greater self-esteem, health, and civic engagement, have been called into question by research. The government, critics argue, should focus on ensuring high-quality, affordable housing rather than promoting homeownership for its own sake.


At 3/21/2009 10:17 PM, Blogger Highgamma said...

"The government, critics argue, should focus on ensuring high-quality, affordable housing"

Why should the government do that? They'd screw that up just as badly as they screwed up trying to make everyone a homeowner.

At 3/21/2009 11:19 PM, Blogger TJList said...

It has been a while since I read it, so my details may be a bit hazy. However, a friend recently reminded me that in Rich Dad, Poor Dad, Robert Kiyosaki argues that home ownership is a bad bet. He says that owning a home is in the wrong quadrant, where it requires money to update and maintain but provides no means of bringing it in.

Based on my experiences in the last 2 years, I have no desire to own a home. The sooner I can get out of mine, the better.

At 3/22/2009 1:35 AM, Blogger bobble said...

"Remember the ownership society? President George W. Bush championed the concept when he was running for re-election in 2004, envisioning a world in which every American family owned a house and a stock portfolio, and government stayed out of the way of the American Dream.

To achieve his vision, Bush pushed new policies encouraging homeownership, like the "zero-down-payment initiative," which was much as it sounds—a government-sponsored program that allowed people to get mortgages without a down payment."


"But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.
And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules . . .

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread."

". . . Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.


At 3/22/2009 3:28 AM, Blogger juandos said...

Note that bobble takes the very propagandist arms of the left, the New York Times and Newsweek (shown to be patently and repetitively flawed sources of info) to hide the fact of where the financial problems really originated...

Informed people know otherwise...

Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown

At 3/22/2009 8:11 AM, Blogger daltonsbriefs said...

Sorry to use smaller words than some of your smarter commenters, but that's a vapid theory in general.

Homeownership is one of the basic components of the American Dream, move to Europe if you want to live in army barracks owned by the government or wealthy investors.

Ownership of real estate is safe and frankly even the minor correction suffered in vacation markets the overall return on real estate is solid.

Agree that House Democrats pushed foolishness in the form of CRA regulations, again the government manipulating markets to gain some sort of quota. If Bush supported these manipulations then he was wrong too.

At 3/22/2009 8:30 AM, Blogger marketdoc said...

Home ownership is what has made this country great over the years when compared with the rest of the world. If anyone seriously thinks that government can do a better job at securing affordable housing, they simply need take a trip through South Chicago or any major metropolitan area where the low-cost housing projects have been tried.. and failed.

At 3/22/2009 9:20 AM, Blogger Vinay Gaonkar said...

Homes are still a form of asset. Over a period of time it value will increase.

If you happen to buy home at the wrong time, you may just end up waiting toooo long to consider your house as a appreciating asset.

With US printing money, inflation will be rising and real estate happens to appreciate with inflation.

In the near term, if you can afford a house buy paying mortgage, which equals your rent, then why not pay money to get your own house. Why make landlords wealthy when you can afford the same.

At 3/22/2009 1:00 PM, Blogger juandos said...

"Homeownership is one of the basic components of the American Dream"...

'devil's advocate' question here, who is suppose to pay for that American Dream? Not the tax payers assuredly, right?

"Home ownership is what has made this country great over the years when compared with the rest of the world"...

No doubt... It also drives a large chunk of the economy...

But who should pay for this constitutionally questionable and totally socialist idea?

At 3/22/2009 1:31 PM, Anonymous Anonymous said...

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people ...

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. ...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings. ...

New York Times, 1999

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. ...

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

"The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies.

New york Times, 2003

The paper's reporters didn't even bother to search their own archives. Had they done so, they would have found a Sept. 20, 1999, article by Steven A. Holmes that reported:

"Fannie Mae has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people."

It quoted former Clinton Budget Director Franklin Raines, who Clinton installed at the helm of Fannie. Raines said he had relaxed credit standards to meet the Clinton administration's goal of 50% loans to low-income minority borrowers.

Further on in the story, a highly regarded scholar warned that Fannie was taking on too much risk and could fail if the housing market ran into trouble.

"If they fail," warned American Enterprise Institute fellow Peter Wallison, "the government will have to step up and bail them out."

His warning was not unique. There were many like it back then. Even Clinton's own Treasury Secretary Lawrence Summers in 1999 and 2000 warned of the dangers subprime lending posed, well before Bush was in office.

Yet Bush gets all the blame for ignoring warnings.

It's plain the New York Times is trying to litigate its case — without full discovery or a fair trial — on behalf of its client, the president-elect, who derided the Republican "Ownership Society" during the campaign.

Small wonder that Americans have lost faith in the media establishment.

IBD taking down the New York Times historical revisionism

At 3/22/2009 1:40 PM, Anonymous Anonymous said...

By the way, Zachary Karabell, the author of the Newsweek hit piece, is not a reporter. He's a politically connected investment manager and a left-wing, Republican hating writer at the Huffington Post.

I guess he doesn't read the New York Times either.

At 3/22/2009 1:47 PM, Anonymous Anonymous said...

Here is an excellent piece, in City Journal, explaining how Clinton and the Democrats used the CRA to shake down banks and funnel billions of dollars into left-wing groups like ACORN.

Once you understand the depth of the corruption, on the part of the Democrat party, you will understand why the New York Times, Newsweek and other left-wing media are desperate for an alternative narrative.

At 3/22/2009 5:54 PM, Blogger QT said...

Anon. 1:31,

Excellent post. There appears to be plenty of blame to go around but it looks like the Democrats started the party. Gary Becker's observations about interest rates held too low for an extended period of time seem to be also on target.

An additional downside of American home ownership appears to be the hollowing out of large cities as families move to safer suburban communities with better schools and better air quality. What is left is a great disparity between rich and poor.

At 3/22/2009 7:17 PM, Blogger bix1951 said...

Once again you need to follow the money. Lots of people get rich from the homeownership subsidies.
big commissions when homes change hands
mortgage industry
title insurance industry
property tax collector
transfer tax collector
etc. etc. etc.

they don't want this gravy train to be cut back!

At 3/22/2009 7:57 PM, Anonymous Anonymous said...

Not to mention the fact that housing has pulled investment from productive investments. This is one reason the US has built a current account deficit. We continue to underinvest in productive assest. The mortgage interest deduction is a sop to the real estate and homebuilding lobby. More government "unintended consequences!!!"

At 3/23/2009 8:59 AM, Blogger ExtremeHobo said...

Homes are still a form of asset. Over a period of time it value will increase.

Todd Brought up the book by Kiyosaki. In book he does some great examples to show how your cashflow actually decreases upon owning a home. He claims that houses should not be viewed as an Asset but as a liabilty (same as your car). There is a difference in buying a place to live (fulfilling a need) and buying investment real-estate.

"If you stop working today, an asset puts money in your pocket and a liability takes money from your pocket. Too often people call liabilities assets. It's important to know the difference between the two."

At 3/23/2009 12:18 PM, Blogger Vinay Gaonkar said...

I agree with Robert Kiyosaki, about his concept of house as a liability.

But he also talks about making fortunes in Real Estate. That means you need to buy a property at some time.

Robert is mainly interested in going for investments that pay dividents. Like incoming house rent checks.

But I think one can also invest for capital appreciation. And if the person is interested in monthly rent checks then he can stay his whole life in a car and rent out his home. Robert has also done something like that.

- Vinay.

At 3/23/2009 5:20 PM, Anonymous Anonymous said...

"The government, critics argue, should focus on ensuring high-quality, affordable housing..."

Even when the mainstream media gets something right (not everyone needs a house), it gets something even more wrong. Why is it the government's job to ensure that I can find a "high-quality" house or apartment? I'd be happy if local building inspectors would do their jobs instead of taking bribes for not inspecting the construction of homes or apartments.

At 3/23/2009 11:10 PM, Blogger Jeff said...

Re: Vinay,
"In the near term, if you can afford a house buy paying mortgage, which equals your rent, then why not pay money to get your own house. Why make landlords wealthy when you can afford the same."

Because there are not-insignificant costs (maintenance, property taxes) and risks (for example, it can be much harder to sell a house than to break a rental contract if your job moves or goes away) that aren't included in the mortgage but which are included in rent.

Home ownership can be a great investment/blessing, if you're ready for it and able to rationally assess your needs and ability to pay. Otherwise, as many people are learning/have learned, it can be a tremendous moneypit/curse.

My financial guru says the minimum requirements for buying a home smartly are: 1)a 3-6 month emergency fund already in place, 2)a 15-year fixed mortgage that is no more than 25% of your take-home pay, and 3)a 20% down payment. I wonder how many people who bought a home with these personal standards in place are facing foreclosure now?

Yes, waiting until you can meet these standards would greatly reduce the number of people who could afford a house, but it would also greatly reduce the number who end up not being able to furnish said house, or who face foreclosure down the road due to relatively minor personal emergencies.

At 3/25/2009 10:34 AM, Anonymous Anonymous said...

Not to mention the fact that hoiusing is a "non-productive" investment. I think this has contributed to the growth in the current account deficit. Just think where we might be if that investment had gone to energy infastructure and manufacturing?

At 4/17/2009 3:31 AM, Anonymous COACHING BY PETER said...

This article is very timely and relevant. As I quote Cameron Muir, an economist, "Home sales are unlikely to fall much further..That being said we expect home sales not to decline much further."

But it's never too late, with the right business plan set up, it will lead to valuable outcome. This is what most counselors would give as an advise.

At 6/05/2009 10:12 PM, Anonymous Anonymous said...

Just because Robert Kiyosaki says that a house is not an asset doesn't mean he is right, and even if you agree with him and don't consider you home an asset, that doesn't mean that it isn't a good idea to own your home. One definition of an asset is:

An asset is a possession that can be evaluated and assessed a dollar value, a financial value.

Well, a house certainly qualifies given that definition. I understand that Kiyosaki is using the term asset differently. He thinks assets should generate cash flow, or at least not decrease your cash flow as compared to alternatives. I do agree that sometimes people place too much importance on owning a home, or owning a home too quickly, or look at it as more of an investment than it is. That said, there are still a lot of good reasons to own a home and live in a neighborhood where people own their homes. First of all, there is the cash flow analysis which seems to come down to increased cash out now and what you could do now with the extra cash versus less cash out later and an increase in the value of the home, and of course you need to factor in the tax implications too. That analysis could go either way depending on the details of the situation, but I would bet that over the long haul that the analysis would more often than not favor home ownership. Another good reason to own a home is quality of life. Living in a neighborhood where people own there homes tends to create a better living environment for all because people generally care about their home and the surrounding environment more. That's hard to put a dollar value on, but it is certainly worth something, and more to some than others. So, in the end, it seems that the decision to own your home is an individual one and may be right for some and wrong for others.

One final note. This is in no way an endorsement for government involvement in the housing market to drive up home ownership. I think that is a horrible idea and the primary cause of the financial crisis.

At 6/20/2009 5:58 PM, Blogger Rog said...

Let the blame games begin, right?.

The fact of the matter is it's not only minorities with questionable credit who were targeted by sub-prime loan officers. Remember that many who would have qualified for prime loans were ushered into sub-prime loans because there was money to be made. Yes, you guessed it: I'm blaming the banks. Government didn't force them to offer bad loans to unqualified, and in some cases, qualified buyers.

Secondly, the government SHOULD be interested in its people being placed in higher quality housing. The bottom line of government is its people. I know that many hate the concept of government, but we live in a social democracy, and you can whine and moan all you want, you still gotta pay those taxes, and you still benefit from doing so, despite what the "Vienna School", Ron Paul and Michael Savage say.

Third, This whole idea that when you pay a landlord or landlady, you are siphoning-off or wasting money is complete nonsense. When I pay my rent, I'm paying for the service of having a roof over my head and having said roof being properly kept and maintained. I can't live for free. I think I can safely say that in very few cases are mortgages EVER lower than rent, particularly if one lives in a large, urban market, and particularly after he/she calculates property taxes, maintenance, insurances (yes, I meant to type the 's' because I live in South Florida), and other fees.

Additionally, I total reject this notion that because I rent, I care less about my neighborhood. I attend my council meetings quite regularly, and the place is always practically empty. Where are all the homeowners? I have friends who are homeowners, and they don't even know where local parks are, what bus route passes by their home or what their town/city boundaries are. Heck, some of them don't even know who their local mayors or council people are. Just the other day, I had to direct one of my homeowner friends to the local GOVERNMENT help line to take care of the issue of stray pets in her neighborhood (yes, I'm sure you guessed why that was happening); how could you own a home for ten years and not know the basic numbers to call for neighborhood-related issues? Anyways, animal services addressed the issue within days. So much for civic involvement by homeowners. Give me a break.

Finally, whether you do it yourself or hire a contractor, home improvements and repairs take up a lot of precious time that I would much rather be spending with my friends, neighbors and family. Home ownership is, indeed, overrated.


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