Matt Yglesias writes,
the administration isn’t pushing for any major rethink of housing policy in the wake of the crisis. The idea that the government should encourage people to make leveraged investments in owner-occupied housing and that these investments should be the cornerstone of middle-class savings is alive and well with us.
There are real estate agents and mortgage brokers in every Congressional district. That tells you everything you need to know about how housing policy is going to be made.
Something rarely mentioned is that basic finance tells you home ownership (or “ownership”) runs against the principle of portfolio diversification. Most households hold a much too large proportion of their asset wealth in their house. This is not unlike employees who invest a lot of their wealth in their own company’s shares. This is just doubling-down.
I attended a talk given by a real estate economics professor, who claimed to show that children raised in houses did better in life than children not raised in houses (even adjusting for reverse causality, etc.). When I pointed out that his research received funding from a mortgage broker association, he was at a loss for words. (I do not think he is dishonest, but there is an obvious conflict of interest.)
You should account for the effect of untaxed imputed income. A higher effective return after taxes compensates for the increased volatility of a less diversified portfolio.
An oversimplified formula, but if i(1-t) < (rent/price), then you come out ahead with an investment you can also live in. An even better deal if the interest on home loans in uniquely deductible for individuals.
I'm not sure what cap-rates are lately, but in my area, rent/price seems to be about 5-6% which is much higher than the current interest rate, let alone what's left when reduced by taxes.
@Jack
Maybe there is a counter-intuitive, yet rational, reason for having a large portion of one’s net worth in a home. Since a huge portion of the country is in the same position, the government simply cannot let the value of housing fall. Nothing would surprise me – even the government buying millions of homes with printed money, or forgiving mortgages – in the wake of another housing crisis. Safety in numbers.
“…the government simply cannot let the value of housing fall.” Really? I seem to recall that the government did exactly that. It is a basic mistake to consider your home an investment.
ZeroHedge (quoting Goldman) suggests that there may be another reason that housing is overly-supported. If it were allowed to find its own level, the results might reveal that things are not going as well as advertised:
http://www.zerohedge.com/news/2013-08-13/goldman-without-boost-housing-real-gdp-growth-would-fall-below-1-year
There’s an aspect of home ownership that I think is often overlooked. Ownership, even financed ownership, is a hedge against rising rents. It’s not unusual for rental expenses to double over a decade; expenses will grow at a much slower rate for homeowners. If your income rises over time to keep up with rising rents, but your expenses do not, that alone is a sound investment regardless of whether the home’s value appreciates or not.
Sure, but why should that hedge be subsidized? I suspect it makes the problem of rising rents worse — home owners/debtors aren’t interested in allowing more housing being built, particularly near them.
I agree there should be no subsidy — but unlike Arnold I don’t consider the mortgage interest deduction a subsidy. I think a premium of a few hundred basis points would fix any issues that Fannie or Freddie purport to address and we could do well without them.
I was just trying to address the idea that houses are a “bad” investment when they don’t appreciate. Not necessarily.
“expenses will grow at a much slower rate for homeowners”
I’m not sure if you’re saying that the price of labor and supplies would grow at a much slower rate for homeowners over a decade, or if you’re saying that over a decade a homeowner will spend less than a renter on shelter.
In the 7 years I’ve lived in my present patio home here in Fort Collins, Colorado (built ~1984), I’ve replaced a water heater, paid the deductible on a hail-stormed roof replacement, replaced the original carpeting, replaced window units that had lost their seal, invested in a xeriscaped back yard, updated window treatments, bath lighting fixtures and kitchen and bath faucets all ’round, and painted the exterior. Plus homeowners insurance, real estate taxes, water/sewer fees, and HOA fees.
I’ve pretty much decided that “renting” may be, if not a much better deal than “owning,” then at least at par, with far greater mobility as a bonus.
You listed a bunch of stuff, I don’t how much of it was necessary maintenance and repair and how much was capital investment. Anyway, it’s not appropriate to include home improvement projects as a housing cost.
If you are moving frequently or value the ability to move frequently, then renting is the better choice. If you plan to stay in one place a long time and that place is enjoying economic growth, then yes, your housing expenses will increase more slowly as an owner.
I was trying to suggest that, to compare the cost of renting to the cost of “owning” one’s shelter and to make the comparison apples to apples, you need to look beyond and beneath the surface amounts.
One’s lump-sum rent, speaking generally of course, typically includes allocated amounts sufficient to cover the landlord’s loan for purchase, taxes, insurance, and, yes, routine maintenance and repair and improvements such as upgrades designed to appeal to the desired tenant market. Also, the LL will fund, from those rents, reserves for expected future expenses, and some profit to put in his pocket.
To directly compare the cost of “owning” a home, then, (to my way of thinking anyway) you should include not only the initial purchase loan and any capital improvements, but also expenses similar to those of a landlord that you incur in order to make and keep the property looking attractive, well-maintained and therefor more readily marketable when the time comes to sell it, hopefully at a price sufficiently exceeding ALL of those costs such that it funds some profit to the seller.
It’s not enough to compare lump-sum rent to mortgage interest rate and/or monthly payment. They are not equivalent in what they represent.
I probably didn’t do a very good job of writing my comment. Sorry. I hope this more clearly expresses my intent.
*therefore*
Perhaps I was unclear, because it seems you are assuming a lot of things about my comments that I didn’t intend. For example, I never claimed you should compare rental expense only to mortgage expense. I thought it was clear that I meant you should compare total expenses related to housing.
Include costs that bring the property up to and keep it at neighborhood standards. The point is that a large fraction of the total expenses are fixed, and the rest will grow at something like the inflation rate. Rents can increase faster than that, and over time a large gap can form. I’m not claiming this is what always happens, but I think it happens often.
I may just be cynical, but I always have thought that the reason the government pushed for owner-occupied housing is that it makes the population less mobile and more easily controlled by the governments at all levels.
This is only true in a bust, not true in a boom, when you can offload your house quickly. But yeah, any move which ties people down more and makes them less likely to “vote” with their feet is good for big govt. Do you really think the politicians are smart enough, or perhaps diabolical enough is the right word, 😉 to come up with such a plan? Seeing these chuckleheads talk, I doubt it.
It’s true in a boom too because it’s still very expensive to turn over a house (realtor and other fees).
I don’t think your idea is well-founded but for what it’s worth, another good way to keep people in the same place for a long time is to regulate rents.
What about homeowners? In every Congressional district there are more homeowners than real estate agents and mortgage brokers combined. And homeowners, whether or not they have a mortgage, want home prices to be higher.