Wednesday, June 25, 2008

Home Ownership


Paul Krugman convincingly argues that the glories of home ownership are overstated, but I think he overstates his own case.
Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.”
Krugman correctly notes that home ownership carries financial risk (made all the more clear by the bursting of the "housing bubble"), ties people down, and increases commuting costs. On the second issue, I would respond that many of the costs and complexity of moving - real estate agent commissions, title insurance, transferring title, etc. - are unnecessarily inflated and could be significantly reduced with some common sense reforms of how property is titled and transferred.

But despite the risk, under the traditional model of a down payment and the use of home equity loans for home improvement as opposed to discretionary spending, owning a home is very likely to result in the long-term accumulation of wealth. It also helps create community - sure, you're tied down, but you're much more likely to take care of your own home than your rental property, and that benefits your other "tied down" neighbors. Consider what often happens to housing values when there are "too many rentals" in a neighborhood.

At the same time, we should not overlook the tax burdens created by suburbanization, which raises not only the costs of commuting but also requires substantial infrastructure costs - roads, highways, emergency services, extending utilities, etc. - to be largely borne by other taxpayers. When most people own homes, that cost arguably is spread around such that it may not seem unfair, but it's a substantial cost and is largely invisible. There's a big something to be said for encouraging people to live in existing urban centers instead of building new suburbs.

There probably is a population for which the "American dream" of owning a home overshadows a realistic appraisal of whether home ownership is a good idea for them. Do they have a sufficient, stable income to afford a home - including upkeep and commuting costs? Will they be moving soon or frequently, or should they expect to? Do they understand and wish to assume the responsibilities of home ownership, or would they be better of renting (or buying a condo)? The solution there is education.

3 comments:

  1. When I was (shudder) in legal aid, a lot of folks got caught up in the "rent to own" scam. I say "scam" because the "contracts" used were often so pro-seller that they were laughable.

    I felt awful, but so many folks by into the "I must own a home!!1!1!" idea that they don't think things through and end up with a bum deal. Naturally, legal aid is so swamped that we couldn't do much to help :(

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  2. I've seen some "rent to own" contracts - or at least what the renter believed to be "rent to own" contracts - that turned out to be standard lease agreements. Or where the tenant knew that they had only signed a lease, but were relying upon an oral promise that it was "rent to own".

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  3. Exactly! I used to work at a legal aid hotline (a lovely, $15/hour job) and I had to try to explain the "four corners doctrine" to folks. If they caught on--and most did--I heard some really colorful strings of swear words....

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