Paul Krugman: Home Not-So-Sweet Home

Should the government promote home ownership?:

Home Not-So-Sweet Home, by Paul Krugman, Commentary, NY Times: “Owning a home lies at the heart of the American dream.” So declared President Bush in 2002, introducing his “Homeownership Challenge” — a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups.

Oops. While homeownership rose as the housing bubble inflated, temporarily giving Mr. Bush something to boast about, it plunged — especially for African-Americans — when the bubble popped. Today, the percentage of American families owning their own homes is no higher than it was six years ago...

But here’s a question...: Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?

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.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic. Bring back property qualifications for voting!

Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens. ...Austan Goolsbee,... one of Barack Obama’s top advisers, warned against a crackdown on subprime lending. “For be it ever so humble,” he wrote, “there really is no place like home, even if it does come with a balloon payment mortgage.”

And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy..., the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers...

In effect, U.S. policy is based on the premise that everyone should be a homeowner. But here’s the thing: There are some real disadvantages to homeownership.

First of all, there’s the financial risk... borrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.

This isn’t a hypothetical worry... Now that the bubble has burst,... there are probably around 10 million households with ... mortgages that exceed the value of their houses.

Owning a home also ties workers down. Even in the best of times, the costs and hassle of selling one home and buying another ... tend to make workers reluctant to go where the jobs are.

And these are not the best of times. Right now,... homeowners ... are constrained from seeking opportunities elsewhere, because it’s very hard to sell their houses.

Finally, there’s the cost of commuting. Buying a home usually ... means buying ... a long way out, where land is cheap. In an age of $4 gas and concerns about climate change, that’s an increasingly problematic choice.

There are, of course, advantages to homeownership... But homeownership isn’t for everyone. In fact, given the way U.S. policy favors owning over renting, you can make a good case that America already has too many homeowners.

O.K., I know how some people will respond: anyone who questions the ideal of homeownership must want the population “confined to Soviet-style concrete-block high-rises” (as a Bloomberg columnist recently put it). Um, no. All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

It's only fair that the playing field be leveled, I can remember the feeling of inequity as I was filling out my taxes in the years I was a renter. And there's certainly no reason to disparage anyone just because they rent rather than own a home.

But there is something special about owning your own home, I think, and we should be careful not to erect new barriers to ownership and do our best to remove those that already exist. Thus, if fluctuations in the value of a house after purchase is a big risk, then we can think about protecting people with some type of price insurance, one type would protect the downside in return for a share of the upside (this already exists, but should it be required in some cases?). If liquidity is the problem, there may be ways for financial innovation or government to help there too, surely there's some way to help get workers where the jobs are when the only thing holding them back is an unsold house. And ownership, even in "Soviet-style concrete-block high-rises" is possible, condos come to mind, so it's not ownership itself that causes the long commute, but rather a desire for something else that isn't available in high density areas, a yard, room for a dog, something like that. [Within high density areas, ownership should be available for those who prefer it so as not to force those who prefer ownership but don't care about a yard into a long commute. That way, even if there is a distortion toward ownership, it doesn't force people to move into the suburbs to take advantage of the tax or other benefits.]

I'd like to see everyone who wants to own a home and has the means to do so be given a fair chance to make that happen, and to have them fully protected against risks that could wipe them out or prevent them from responding to new opportunities in other areas (though a lease with several months left to go can tie a person down as well). But, I don't see any reason to distort the choice one way or the other. Having to take care of a yard, the roof, rake leaves, worry about having to repair internal plumbing problems, and so on isn't for everyone. Some people would prefer to shift these duties and risks onto someone else and I agree that they shouldn't be penalized for doing so.

One last thought. If we are going to try to level the playing field, as we should, there are two ways to proceed. One is to remove the special advantages that homeowners currently enjoy. That's the hard way since it takes something away from people. The other is to add new perks for renters until they get as many breaks as homeowners now enjoy. That's the easy way since it gives people new goodies instead of taking away the benefits they already have. But from an economic standpoint, the hard way is best, so if we are going to level the playing field, I hope that politicians will take the more difficult but more rewarding path. But, realistically, the politics makes it unlikely they'll move in either direction.

Comments

[anne]

http://www.nytimes.com/2008/06/23/opinion/23krugman.html?ref=opinion&pagewanted=print

Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens. Early last year, just as the mortgage meltdown was beginning, Austan Goolsbee, a University of Chicago economist who is one of Barack Obama’s top advisers, warned against a crackdown on subprime lending. “For be it ever so humble,” he wrote, “there really is no place like home, even if it does come with a balloon payment mortgage.” ...

Lovely....

[JeffF]

"...it's not ownership itself that causes the long commute..."

Obviously not the whole story, but surely renters are significantly more likely to move to shorten their commute than owners, so I would hypothesize that ownership does lengthen commutes to some degree.

[anne]

http://www.epi.org/printer.cfm?id=3011&content_type=1&nice_name=webfeatures_snapshots_20080611

June 11, 2008

Subprime Mortgages Are Nearly Double for Hispanics and African Americans
By Algernon Austin

Subprime mortgages have gone disproportionately to Hispanics and African Americans. In 2006, the rate of subprime mortgages for home purchase for Hispanics and Africans Americans was approximately double the white rate according to the Joint Center for Political and Economic Studies. Twenty-six percent of mortgages for home purchase by whites were subprime. For Hispanics, it was 47% and for African Americans, 53%.1

Recent studies suggest that creditworthiness—alone or in combination with factors other than race—cannot account for these disparities. When researchers from the Federal Reserve and the Wharton School of Business conducted an analysis that took into account the percent of adults in a neighborhood who were a very high credit risk, they still found a positive relationship between the prevalence of subprime loans and the share of minorities in a neighborhood.2 An analysis by the Center for Responsible Lending found that even after taking into account individual credit scores and other characteristics, Hispanic and African American borrowers were more than 30% more likely to receive higher-rate subprime loans.3 These and other studies, coupled with the long history of racial discrimination in lending, raise the prospect that discrimination may be a factor in the high rates of subprime loans among Hispanics and African Americans.

While a higher percentage of people of color assume subprime mortgages, most subprime loans do not go to people of color. For many years, people of color have been calling for more attention to and better regulation of lending institutions. Had policy makers been more attentive to these calls, there might never have been a subprime mortgage crisis....

[Winslow R.]

Home ownership builds wealth in a way most people can understand, unlike stocks, bonds or even mutual funds. I know people don't call a home an investment but with HELOC loans it is. I personally got my start as an entrepreneur because of a HELOC loan and know of many others that did too.

I'd be curious to see a study on how the money from sub prime vs HELOC loans was spent into the real economy. How many new businesses have been created?

Yes the guys creating these loans gave many of them to the 'wrong' people, but with better regulation the process did not have to get out of hand like it did.

Yes the real economy will need a new source of liquidity to replace the housing boom, possibly it will be a combination of bank bailouts and exports to Opec. Of the choices to spend resources, housing isn't near as wasteful as things being built in Abu Dhabi. Pushing the envelope on home ownership isn't what caused the problem, it was just an excuse.

Shame on Krugman for focusing the blame on an ownership society. The problem wasn't the idea of home ownership, it was Bush's implementation. Pretty much anything he's involved with turns into a disaster.

[Richard H. Serlin]

There's really a lot I'd like to say regarding this post, but I'll have to restrain myself. The fact is, I got into blogging largely because I was hired to design and run a personal finance website for the University of Arizona and thought knowledge of blogging would help, especially for inexpensive promotion. It's been great, but alas, at this point in my academic and business careers, I can't justify spending much time at it.

That said, some quick but I think important things regarding this post:

First, I promote it a lot, but I think my brief working article, "Let's Cut the Ammunition to the Housing Arms Race Permanently", really explains well some of the best things we can do to help homeowners over the long run. It's available at: http://works.bepress.com/richard_serlin/14/ .

Second, one of the most important things in deciding whether the government should promote something is whether it produces net positive externalities (and how much). I think home ownership does have large net positive externalities, but only for people in certain situations, not for all people in all situations. So government promotion of homeownership could be efficiency and welfare enhancing – if well designed.

Third, a huge issue which could really change things in as little as the next 10 or 20 years is advances in video conferencing and other telecommunications. It's possible that in 10 or 20 years video conferencing could get so good that 25% to over 50% of skilled jobs could be done from anywhere. You could imagine say business managers or engineers communicating with each other via life-size ultra-high resolution monitors with an array of extremely accurate computer controlled mobile cameras and microphones. And you could imagine this and much more amazing telecom equipment being relatively inexpensive.

At that point, many or most skilled people could do their jobs from home anywhere, in Oak Park, Michigan, Podunk, Nebraska, anywhere. And if they didn't want to work at home, they could work in a Kinkos rent-an-office, or small satellite office, or complex, anywhere. When this happens it will really change society. It will make it so that homeownership makes sense for many more people, as you typically have to live in a home for at least 3-5 years without moving for it to make economic sense. Extended families will be able to stay together, rather than parents having to move far from their parents, siblings, and old friends for work. There will be a great savings in energy and decreases in pollution. The implications are huge. This is certainly something academics should be studying heavily for many reasons, one of which is, with the great net positive externalities, how, and how much, should the government be supporting this, the advancement of these telecom technologies.

Fourth, a really common misconception regarding homeownership, that I even heard once from a top finance professor, is that a benefit of homeownership is the leverage. But with a home, the leverage actually works against you both in risk and expected return. It hurts you. A typical mortgage rate is about 6%, the average return on a home, historically, as in Yale's Robert Shiller's, Irrational Exuberance, 2nd Edition, is only 0.4% above inflation, so the leverage not only increases the risk, it lowers the average return too! The expected home price appreciation is about 3.4%, but you're borrowing at 6%. Of course, this can be worth it because of the savings on rent, but you save on rent buying even the cheapest home. Every extra $100,000 you spend after that on a home costs 6% per year and brings in only 3.4% per year in average home price appreciation, and that's not even counting additional maintained and insurance costs. Still, it may be worth the expense if you enjoy the more expensive home enough, but as Harvard's Elizabeth Warren and I advise, never let your Must-Have (fixed) expenses get above 50% of your after tax income.

[Ellen1910]

I have to admit I don't quite understand the claim that owners have these huge benefits that renters don't enjoy. Don't we agree that renting competes with owning? In the absence of the ownership tax benefits (subsidies) the landlord who gets all these tax benefits and depreciation would enjoy a huge advantage.

Note: This says nothing about the question of whether housing of all forms is the type of capital investment which the tax code should encourage. That's another discussion, entirely.

[Promotion]

The best way to promote home ownership is to reduce the price of homes so that they are affordable. Eliminating the regressive property tax would also be helpful.

[OB]

A quibble about Thoma's proposal for house-price insurance:

Either he has in mind some private insurance home-owners could pay for along with life-insurance, in which case, fine.

Or he has in mind some governmental insurance, which would seem like a very very bad idea. (1) If all those subprime buyers in 05-06 had had such insurance, uncle sam would be in the hole to the tune of $ 2 trillion and counting. (2) with no visible risk to the down side, what's to stop a housing bubble from going through the roof?

[spencer]

Mark, you and PK are ignoring the point that the tax exempt benefits for housing generally flows through to the renter in the form of lower rents. Rents are generally set to cover the owners cash flow -- including the tax deduction of interest -- while the owners really depends on the rising value of the property or capital gains for their profits or return on capital.

[Real Person from the Real World]

What Serlin says above sense. My two cents is that real estate got to be an investment game. Take a look at all the investment gurus out there, from Robert Allen to Kiyosaki and Donald Trump. These guys' bread and butter is selling courses to middle class Americans who want to score big, somewhere, somehow, when things just seem to be getting tougher to make a buck. Yes, real estate ties you down, but eventually everyone gets tired of the gypsy life, and things have gotten so exploitive in our society, I think I would prefer to own and struggle, rather than pay some guy who thinks he is getting rich at my expense.

Meanwhile, there is also an article in the NYTimes today, Won't you be my neighbor, about how we are building these lone fortresses, where you hardly know the people next door. No wonder we have all these libertarian jerks saying, I got mine, screw everyone else.

There is no sense of community anymore, either in the workplace, full of contract workers and foreign Visa workers, or in those nice suburban enclaves. We recently hired a sales person, and her main interest is getting her commissions and upping them. Everyone else in the office, and outside is there for manipulation to this end. If you cannot contribute to this goal, you are marginalized.

Cheap and efficient has brought us down so far. Eventually we will all hit bottom. What will come out of this, who knows?

[Road to Serfdom]

Short of building homes to increase supply, all other government schemes are just financial engineering that increases costs for the existing home buyer. All the financial engineering that reportedly helped home buyers ended up ballooning the cost of homes.

But then these central planners never understand such real economy effects.

[baileyman]

"In effect, U.S. policy is based on the premise that everyone should be a homeowner."

Could be restated:

"In effect, U.S. policy is based on the premise that everyone should be a debtor."

And this may better align with large financial interests.

[baileyman]

"In effect, U.S. policy is based on the premise that everyone should be a homeowner."

Could be restated:

"In effect, U.S. policy is based on the premise that everyone should be a debtor."

And this may better align with large financial interests.

[anne]

http://krugman.blogs.nytimes.com/2008/06/23/now-they-tell-us/

June 23, 2008

Now They Tell Us
By Paul Krugman

So, the people who didn’t see the housing bust coming, and in fact argued strenuously that there was no bubble, * now tell us that it’s the worst housing slump in 60 years. ** Thanks a lot, guys.

Next thing you know they’ll be having panel discussions about the future of Iraq consisting entirely of people who were enthusiastically pro-war. Oh, wait.

* http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=06&year=2008&base_name=homeownership_rate_plummets_wh

** http://www.marketwatch.com/news/story/housing-slump-shaping-up-worst/story.aspx

[ken melvin]

Multi purpose was the middle name of many government homeowner assistance programs. Vs. help developer and lender, these could be retooled to help deal with urban renewal and low income housing.

[odograph]

I've long thought we should remove those home-owner credits.

The first reason is the fairness issue.

The second is that the benefit is, actually, long gone. In a "hot" market the sellers have all built in the savings buyers will get on taxes, etc. The buyers all stretch against their income constraints, taking into account their tax benefits, to buy just as much house as they can.

The interest deduction (etc.) don't help me when every buyer has the same benefit.

(On houses being "nice" and therefore the government should buy everyone one ... there are a lot of "nice" things in life Mark. That doesn't mean government can, or can afford, to provide them all.)

[reason]

promotion
The best way to promote home ownership is to reduce the price of homes so that they are affordable. Eliminating the regressive property tax would also be helpful.

Save us from partial analysis. Did you not understand what Serlin wrote just before you did?

Property taxes don't increase the price of homes they REDUCE them (since they decrease the discounted present value of the land).

And property taxes aren't regressive they are progressive (the richer you are the more house and land you can afford.)

The problem is that in the US Education and Police are paid for locally so the poorer areas have to have higher average property rates (as land prices are lower) in order to pay for schools. In most countries education and policing are paid for by state governments (or equivalent). So you are barking up the wrong tree.

The real thing that should be done is to try to reduce the surcharge in land costs that accrue to better areas, by making all areas better to live in. Invest in infrastructure, and spread best practice urban design. Build more rapid transit links between urban areas.

[reason]

None the less it is a problem having so much family capital ties up in a home when it is mobility is needed. It would actuallly make more sense if we all bought homes for our siblings and vice-versa.

[reason]

That said, of course, I prefer owning the home I live in, rather than renting it (because I have more control). And owning to rent is high risk. Perhaps therein lies an opportunity for financial innovation (or even government intervention - social insurance seems increasingly clearly to be an area in which government has advantages).

The problem with owning is twofold:
1. You don't really own it, the bank does;
2. You are taking on (often invisible to you) risk.

Now the door is open for the LVT people. Georgian - where are you, you missed your cue!

[btg]

I recall seeing some quote to the effect that home ownership essentially turns people into small-c conservatives - having to pay property taxes (instead of it being buried into a bundled rent payment) make them more tax averse, and having all that equity dependant on local property values makes them tough on crime or anything that will push property vales down... and then this mindset expands into other things.

i am also puzzled that krugman ignores the possibility of condo ownership - seeing as how he lives in the shadow of manhattan - but traditionally home ownership did lead to spawl - here in Ontario - sondo ownership was not a legal form until the late 1960s, and it didn't begin to gain wide acceptance into the late 1970s - I assume that the same was true in many US states. Homw ownership did lead to the flight to the suburbs that left many US inner-cities so desolate and empty.

Gernenrally speaking, giving somebody ownership, or some other clear stake in the operations or maintenance of something, should mean that they will take better care of it. When I rent a car when I travel, I often drive it far harder than I would drive my own car at home. Aprtment buildings, where everyone is a tenant, are probably far more likely to have graffitti or damage from tenants than condo buildings - in an apartment, tenants feel that the market, or rent controls, mean that the cost of repairs will hurt the owner - in a condo - the residents/unit owners themselves will pay. this is probably even true in non-profit co-ops, where the residents run the building and set the rents themselves (in Canada, there was amove away from public housing with 100% subsidised units towards non-profits with 25% to 30% subsidized units, with the rest being market rent units, in the 70s, as a way of dealing with the problems typically associated with the big "housing projects" in the US - in Chicago, the Bronx, Pruit-Igo, etc.)

In the end, home ownership should be encouraged as it is a way of getting people to save/invest.

As for affordability, one of the odd things is that things that were intended to bring down the cost of home ownership have ultimately lead to higher prices - it is a catch 22 - longer amortisation and higher LTV ratios have just allowed people to bid up the price of existing housing stock, which in tern drives up the price of land for new stock. homes cost less when people had to have 50% saved to buy a house, because they could only borrow 50% an no more!

[reason]

Odograph - yes you are 100% correct, and in fact it works the OTHER way. Taxes on land will take down the price of land. That in turn will reduce the debt people are taking on, and the increased taxes can be used to reduce other taxes. You may pay more taxes, but better to pay the local government for infrastructure than to pay the bank for --- what exactly? There I've done it, I've made the Georgian case for them. The problem is of course that MOST people are not keen in land values falling, but those land values are their asset (and they have already paid someone for it).

[robertdfeinman]

The real push for homeownership in the suburbs happened after WWII when there were many servicemen returning home and starting families.

What the government was trying to foster was the elimination of the inner city tenements that had existed since the beginning of the industrial revolution in the 1870's. I suggest a bit of study of housing conditions from then up to the 1940's to see what things were like. Read Jacob Riis or look at his photos and those of other muckrakers of the period.

It wasn't homeownership, per se, than was being promoted, it was a more healthful environment, less disease, less crime, and the elimination of street gangs and illegal sweatshops in the tenements.

The first big project was Levittown, where a two bedroom house, with a car port, and even a TV was $7,000.

As with many programs, inertia takes over and the original objectives have been forgotten and now we have McMansions in the exurbs which solve no social problems, but make some of their own.

The same government bias against cities which is a result of the way senate seats are apportioned (18% of the population controls 50% of the seats) has meant that projects to promote home ownership within cities have been ignored for decades. The result is that tree-lined city streets with modest one and two family houses in Buffalo, Rochester, Detroit, Cleveland and elsewhere have fallen into disrepair, been abandoned and/or demolished. The result has been that the population in these places has dropped by as much as half.

A bit more urban city planning supported by the federal government would have prevented many of the looming problems, not only with home ownership itself, but sprawl, lack of transportation and water shortages in the Southwest.

Nothing happens by accident. Political decisions of omission are just as important as those of commission. Thank the senators from South Dakota and the other empty states for the present problems.

[reason]

I have a question for Mark Thoma here.

Mark, are there courses offered in Urban economics. Courses that try to explain how some areas can support such high land costs, that look at how those high costs in turn change the neighbourhoods (as a consequence of the high land costs) - i.e. the evolution of cities and what cities can do to make the urban environment more valuable (and so compete with more expensive cities and ultimately bring down the cost of urban land). Jane Jacobs meets Paul Samualson or something like that?

[Real Person from the Real World]

I still say, that the spoiler was the game some people played:
Real Estate investment gurus like Robert Allen to Kiyosaki and Donald Trump, all selling big dreams, along side the mortgage scams from Countrywide financial that screwed the virtue of owning a home. Remember the Capra movie, A Wonderful Life? The dismal future, with everyone paying rent to the old miser? True, owning a home ties you down, in an era where mobility has career advantages. But so far, all I see mobility working for the H1b visa serfs who want to come here to the US, and they all eventually want to buy and settle as well. I don't see too many US IT grads going abroad. Maybe it only works in that one direction (from cheap wage countries moving to high wage countries). Certainly, it is more for the young who are starting out, not for the older.

[evagrius]

It seems that no one has examined the long-range effects that home owner obsession has on the environment, consumption, energy usage, economic efficiency etc;.

It isn't home ownership in the first place for many but mainly another very large debt.

New homes are built far larger than they need to be, ( McMansions), often with very little thought on energy efficiency, consuming large amounts of lumber etc; requiring expensive extended infrastucture of gas, electricity, water lines etc; and built far from urban areas with no public transportation thus requiring highways, auto traffic with requisite trafic congestion etc;.

I don't see any of that being discussed.

[Noni Mausa]

I think the real distinction to be made is the distinction between residents and nomads.

In New York City for instance, plenty of people rent apartments and stay in them for decades. Those people are residents. Conversely, senior management people generally buy homes wherever they are posted, or so I assume -- but they stand poised to move to the next city in the next job, so can these people be counted as residents?

The nomadic lifestyle is described in anthropology books as a tribe or community which picks up and moves to a new territory when the resources of the old territory have been depleted. With that in mind, what happens if all the members of all the territories behave as nomads?

It seems like an efficient and reasonable idea to allow people to move more easily to follow the job market. Certainly, this is a agreeable accommodation to business. However, what effect would a largely nomadic population have on the nation, to say nothing of the organization of cities, the health of the land and animals, and what would support the infrastructure needed to for the arrival and departure of large numbers of migrant citizens?

In most parts of the country, to be a resident means to be a homeowner. Or it has done until this past generation. I think the stability supplied to a town by homeowners or other residents is too much taken for granted. My mother's generation -- or at least my mother -- has lived in the same town since 1948, has had the same telephone number since 1951. In my lifetime, it has become far less likely that anyone would stay in the same city for 40 years, much less the same house. as for contact information, cell phones and e-mail addresses change so frequently that often the most stable contact information is the address and phone number of their parents.

People should stay put, businesses should move to them.

Noni

[Real Person from the Real World]

I repeat: Who really has benefited from contract job mobility? The legal Visa population, from low wage countries, and eventually, when they become one of US via Green Card or citizenship, they too, buy homes. The nomad life is more for the young.

[ken melvin]

Conserve water so that they can build more suburbs with lawns.

[btg]

The whole thing with the suburbs goes back to the garden city movement - or even earlier if you go back to Jefferson (and people like Frank Lloyd Wright bought into the whole anti-urban thing - see his Usonian schemes).

We forget how unhealthy cities used to be - the air was filled with soot from coal (London into the 1950s!), there were bad smells and toxic smoke being emmitted from factories, inadequate sanitation, including streets full of horse dung, and generally a lack of parks and recreation facilities for children. and of course - no air conditioning, which made many cities unbearable in the summer (which meant that many people went to the country in the summer - see movies like "The Seven Year Itch" from 1955) - suburbia was meant to be the perfect compromisie between living in town/cities and avoiding the problems people associated with cities.... and this is apart from the whole idea of cities as being morally suspicious - and associated sin of all types!!!

The inner cities declined not just because of the rise of suburbia, but becauseof race - people wanting to live in white-only neighbourhoods and the "red-lining" of neighbourhoods when non-whites moved in, which killed property values and accelerated the decline by making it impossible to borrow to buy properties there.

[Winslow R.]

Richard wrote: "Fourth, a really common misconception regarding homeownership, that I even heard once from a top finance professor, is that a benefit of homeownership is the leverage. But with a home, the leverage actually works against you both in risk and expected return. It hurts you. A typical mortgage rate is about 6%, the average return on a home, historically, as in Yale's Robert Shiller's, Irrational Exuberance, 2nd Edition, is only 0.4% above inflation, so the leverage not only increases the risk, it lowers the average return too! The expected home price appreciation is about 3.4%, but you're borrowing at 6%."

Richard you are so wrong I have to respond.

Okay let's do the numbers on a $100,000 with 20% down or 5x leverage and a
6% loan or $6000/year and
3.4% or $3400/year appreciation.

Let's use the historic rent/price ratio of
5.5% or $5500/year.

http://morris.marginalq.com/DLM_fullpaper.pdf

Okay the difference between renting and owning $6000-$5500 is $500/year. Add in the appreciation when owning $3400 and we have a net of $2900.

$2900/$20000 investment is 14.5% return with leverage
$2900/$100000 investment is 2.9% return without leverage.

Duh. Your other points were well taken. Falling home prices can turn the leverage against you. Leverage can be dangerous, but historically home prices don't fall.

[Fred]

Given that swiss home ownership rate is under 40%

http://www.swissinfo.org/eng/swissinfo.html?siteSect=107&sid=6029902&cKey=1125483769000

it is pretty clear that home onwership is not the only way to social stability. On the other hand, the US culture isn't going to morph into Swiss culture any time soon. That being said, if we are going to promote home ownership via subsidies, why promote being in debt via an interest rate deduction as opposed to promoting equity ownership?

Anyway, the future is pretty clear to me: something like those giant Arizona/Florida retirement communities, except for younger people, including families. That is, planned cities built with cheap manufactured housing that doesn't look cheap, with much less space devoted to streets, lots of open greenspace, and people using golf carts, bicycles and their own 2 feet to get around rather than driving Hummers. With a paternalistic corporation setting and enforcing rules to replace the paternalistic government that we have been busy dismanteling these past few years. The final result will be housing that costs like twice the household income, but has a stiff homeowners fee (replacement for the property taxes that the voters hate so much).

[Lafayette]

Pursuit of happiness

MT: Should the government promote home ownership?

Once again we have the occasion to consider an existentialist question. What are the fundamentals of "life-as-we-know-it"? Would one of them be a neighborhood fast-food shop open 24/24? Not really.

I suggest, for a serious consideration, that we draw our attention to Maslow's hierarchy of needs, first posited in the middle of the Second World War (1943).

The primary responsibility of any society is provide security in a number of areas. Defense of the community, the ability to work and purchase food, shelter, education, etc. Only with a legal framework, engendered in property rights and protected by the state will society be able to function properly.

Those responsibilities mentioned above can be executed in a number of ways, not always uniquely the responsibility of the state. But, what is clear, is that for those who cannot -- for various reasons -- assure the most basic needs (food and shelter), then the state is surely ultimately responsible.

Owning property is always preferable to renting or even welfare housing. It builds ones personal net worth, which an individual/family can carry throughout their lives. This is the foremost safety net of any society, the ability to assure oneself of shelter. Rental property cannot always guarantee such.

It would seem, then, that at least a First Opportunity should be available to all individuals to purchase property at an advantageous interest rate, proposed by the state. This should be a first-and-only chance or proposition for any couple founding a family. Meaning the prospect of interest-rate assistance is assured within a framework that promotes also the foundational prime-value of our society, the family. (How that family is constituted is quite another question.)

Of course, ultimately, it is the general economic environment, namely durable employment, that guarantees ultimate ownership -- not the state. The above proposition is intended simply as a starting mechanism towards property ownership as one starts out on life and our "pursuit of happiness".

[Julio]

Mark Thoma:

"One is to remove the special advantages that homeowners currently enjoy. That's the hard way since it takes something away from people. The other is to add new perks for renters until they get as many breaks as homeowners now enjoy. That's the easy way since it gives people new goodies instead of taking away the benefits they already have. But from an economic standpoint, the hard way is best,..."

Not sure what this is saying -- that housing subsidies are too high? or altogether wrong?

What I'm trying to understand is whether this is similar to healthcare: isn't there a role for the government in supporting everyone? Not just when they fall (e.g. hospital insurance and housing shelters if you're broke) but all the time (full health coverage and housing assistance for everyone)?

In what sense is removing homeownership perks "best from an economic standpoint"?

[david]

Fred, that is one of the most depressing comments I have ever read.

[Winslow R.]

"In what sense is removing homeownership perks "best from an economic standpoint"?"

I'd like to take your point a step further into the future.

With shrinking populations, people will become the scarce resource. Governments will give free housing to get people to live in their jurisdictions, along with free education, and free health care, secure retirements, etc.

The only one that will be taxed will be the owners of the land controlled by that jursidiction and the natural resources extracted from that land. Encouraging home ownership will allow for rent extraction from a larger base of the population.

[Blissex]

«But there is something special about owning your own home, I think, and we should be careful not to erect new barriers to ownership and do our best to remove those that already exist.»

The main and great advantage of promoting home ownership (and car, stock and gun ownership) is that it has been extensively proven to turn many people into "F*ck you! I got mine" petty minded reactionaries who reliably vote Republican (or Tory). Becoming a landlord excites in many the baser snobism and territorialism of many people who aspire to Master of the Plantation status. McManors/McMansions are the result.

Also because:

«I recall seeing some quote to the effect that home ownership essentially turns people into small-c conservatives - having to pay property taxes (instead of it being buried into a bundled rent payment) make them more tax averse, and having all that equity dependant on local property values makes them tough on crime or anything that will push property vales down...»

"anything" like dark skinned expoiters and parasites soiling the tone of the Spring Magnolias subdivision.

«and then this mindset expands into other things.»

It is more a general change of point of view: from having interests similar to other renters (or public transport users, or employees or potential gun victims) to being a landlord in your own right, the "I am fully vested!" point of view.

Grover Norquist has lyrically described how to turn people into vicious petty bourgeoisie that dream of becoming Masters Of The Plantation on a bigger style.

[gc]

I can personally live with or without the mortgage interest deduction, but it seems like it is a red herring when looking at the disaster in the financial markets coming out of the housing bubble. In the 90's, the stock markets were an alternative printing press to create paper wealth. When those people who won the game of musical chairs, and entered the 00's with lots of extra capital because they got out of the tech sector before it crashed, looked for an alternative game to play with their assets, Greenspan made it really, really clear that the approved place to go if you wanted to speculate with asset appreciation was the real estate market. While most of us have a home to live in, clearly a bunch of speculators entered the market. For the speculators, the houses had nothing to do with a place to live. They financed construction well beyond true need. And it really seems that a few, under some circumstances, can move an otherwise roughly balanced market big a great deal. So, this short statement may sound incoherent or crazy, but it seems to me that the interest deduction is of little importance compared to the officially and unofficially sanctioned gambling behavior, when we mete out responsibility for the housing bubble.

[btg]

i was reading last week about "land value taxes" - in places such as http://en.wikipedia.org/wiki/Land_value_tax - this is a property tax but excludes the value of improvements/buildings - interesting concept and it is used in Hong Kong... where Ontario, and Toronto, imposed a land transfer tax that makes no sense whatever - and which has the effect of reducing mobility because there is such a high cost to buying/selling property.

[Blissex]

«where Ontario, and Toronto, imposed a land transfer tax that makes no sense whatever»

Despite the whining of the victims of coerced financing of the cadillacs for the welfare queens and of the t-bone steaks for the strapping young bucks, taxes are usually not designed to punish or reward, but just to raise revenue in a cheapish, hard to evade and are not too objectionable.

Therefore a number of small opportunistic taxes is actually better than a few big ones, and thus there are sometimes quite stupid small taxes that have the advantage of being easy and cheap to collect and hard to evade like the "stamp duty" that you mention above.

Yes, if the percentage is too large the effect is not pretty. But usually the percentage is small enough. Hey, the very clever Usians pay their saviours, the real estate agents, 6% of sale price for their services...

[macburger]

Winslow R. says...

Richard you are so wrong I have to respond.

Okay let's do the numbers on a $100,000 with 20% down or 5x leverage and a
6% loan or $6000/year and
3.4% or $3400/year appreciation.

Let's use the historic rent/price ratio of
5.5% or $5500/year.

Okay the difference between renting and owning $6000-$5500 is $500/year. Add in the appreciation when owning $3400 and we have a net of $2900.

Yeah, right! Note carefully the numbers in Richards example

cost of renting =~ cost of owning

If that were true, none would be arguing about a housing bubble or whether housing was a good investment

That has NOT been true for quite some time

For sheer chicanery, Winslow's comment and example is hard to beat.

[Lord]

There are no homeowner benefits that are not already incorporated into the cost. There are no penalties for renting as rents already incorporate them.

[bill mccullam]

The USA used to have standard 3-5 year mortgages. Then came 1933. After that we stretched things out a bit. When I was last in Denmark they had 75 year mortgages....sort of s long term rent.

[Promotion]

Reason..."...so the poorer areas have to have higher average property rates..."

That sounds regressive to me. With income taxes, if a person falls on hard times causing their income to fall, the income tax falls with it. They can weather the storm. The property tax never falls, so a person who falls on hard times loses their home to the property tax. This causes a world of trouble.

[L2P]

Be fair, macburger. They're takling about "benefits" in general, and looking at appreciation over a historical period - a period when, by definition (if you believe Shiller) rents /= home ownership costs (because otherwise, you have a bubble). It's simple mathematics that, absent either a bubble or a depression, leverage does increase the return to home ownership. Richard's being completely fair and reasonable.

Of course, in a bubble leverage increases the return dramatically, until the bubble pops. Put nothing down, sit on a house for 3 months, make $100,000?

That, my friend, is leverage.

[Fred]

Disgregarding various tax issues, cost of renting should normally be GREATER than the cost of owning (for people who don't move a lot), same as with renting a car (for people who don't trade in their cars a lot). The landlord has to make a profit, after all.

[Michael Cain]

"The nomad life is more for the young."

True, and there is a period in many people's lives where the fact that they have children makes home ownership more attractive. Where you know that the screaming infant isn't keeping the neighbors awake, where you can let the toddlers play safely in the backyard, where you can paint the girls' room pink, put up wall paper, mount the flat screen TV on the wall, replace the stove because you want something better, use the spare room to give the teenager a bit more privacy, etc. Most of which put you at odds with the owner in the case of a rental, if they aren't outright violations of the lease.

[dan]

I vote Blissex' comment for Comment of the Year if not for Best Comment in the Blogosphere. . . Ever.

"The main and great advantage of promoting home ownership (and car, stock and gun ownership) is that it has been extensively proven to turn many people into "F*ck you! I got mine" petty minded reactionaries who reliably vote Republican (or Tory). Becoming a landlord excites in many the baser snobism and territorialism of many people who aspire to Master of the Plantation status."

[Fred]

So how do you explain the situation in Switzerland, with 40% home ownership rates? Switzerland has got to be one of the most conservative cultures on this planet, in the old-fashioned sense of the term conservative: stick-in-the-mud, unwilling to change, revering the past, suspicious of all innovation, etc.

[reason]

Promotion...
Are you a YEC? You seem to be great at quote mining (taking things out of context) and partial analysis (not considering second order effects). No, people are not losing their houses because of council rates, they are losing them because they they couldn't afford them and now can't sell in a falling market.

[reason]

And nobody here seems to addressed the basic issue that any subsidies to home buyers will eventually be reflected in the price and not help the home buyers, but rather the land sellers.

[reason]

If we want to help home buyers, we need to make more places that are better to live in.

Winslow R. The only one that will be taxed will be the owners of the land controlled by that jursidiction and the natural resources extracted from that land.

This is a pure (Henry) Georgian world (usually left libertarian). It sounds a good world, but I doubt we could successfully transition to it. Too many people have a stake in high land prices. Shame in a way.

[reason]

btg...
Re LVT - you really ought to look up Henry George and Left Libertarianism. It seems you might find their ideas attractive (even if I have doubts about the practibility).

Your comments here are generally very good by the way.

Fred your distopian vision of private paternalistic communities could well happen. It would be a very ironic endpoint of Libertarian ideology. You get the paternalism but no votes!

[Lafayette]

Fred: So how do you explain the situation in Switzerland?

Per capita income ($) by country (2005 / 2006) can help to understand why:

Luxembourg (68810 76040)

Norway (60890 66530)

Switzerland (55320 57230)

Denmark (48330 51700)

Iceland (48570 50580)

Ireland (41140 45580)

United States (43560 44970)

Sweden (40910 43580)

Netherlands (39340 42670)

Finland (37530 40650)

United Kingdom (37750 40180)

Note that only one of the above countries is NOT a European country with high taxation and consequently high Social Investments.

[Lafayette]

reason: And nobody here seems to addressed the basic issue that any subsidies to home buyers will eventually be reflected in the price and not help the home buyers, but rather the land sellers.

Buying land for housing development is not affected by "subsidized" interest rate loans, as I suggested above.

Unless I'm missing something ...

[Ismail]

Over here in Germany it is usual to rent, around 60 percent of people do so. Now, the fact that the German property market remained flat in the last decade surely was one factor. But more importantly: why buy a house and accept a large financial burden that will bind you for life and all the extra responsibility? As a tenant you pay a decent amount of money to the landlord while he or she takes care of all repairs. As a tenant you can also easily terminate the rent contract and move on to another flat. Furthermore if house prices are high they become a burden on young people who need housing, esp those that want to move to another location for seeking a job.

[Lafayette]

Bad Faith

RtS: All the financial engineering that reportedly helped home buyers ended up ballooning the cost of homes.

The sub-prime mess is a consequence, first, of cheap money rates and secondly, I suggest, two counts of fraud.

Cheap money presented banks a challenge. How to expand the market to a larger clientele that had heretofore not been part of the market, since clients did not meet minimum credit standards.

By lessening down-payment requirements (to zero), overlooking or hiding substantiation of credit worthiness and falsifying the long-term credit cost by means of "hooker" initial low-rates and down-the-line "balloon payments", credit fraud (imo) was commited. (I feel sure that the statutes of the Truth in Lending Act will prove to be vehicle that the government will pursue this fraud with. Oh well, who knows ...)

The secondary level fraud was in repackaging without verification bad debt and obtaining the green-light ratings from rating agencies -- thereby reselling the toxic waste SIVs.

This was an instance of fraud up and down the line, from the initial credit agent (typically the realty broker commissioned by a credit institution) right up to Investment Bankers who structured and resold the junk as "realty backed investment vehicles at high rates of return".

Which they were, if it were not for the fact that the Investment Vehicles were underpinned by bad faith from the very beginning. Caveat Emptor: SIV buyers did not do their homework in the frenzy to take advantage of the high returns in what they thought, like the original homeowners, was a "print money" environment. They assumed wrongly the trustworthiness of the rating agencies.

If it looks like a bubble and grows like a bubble, then it ain't chewing gum.

I maintain that the gullible homeowners were not to blame, since in any sales transaction it is the responsibility of the purveyor (the seller) to show good faith in the nature of the goods and services proffered. This is the way the law regulating the relationship between seller and buyer is formulated in a great many countries.

I don't know how US law stipulates that relationship. I do think, nonetheless, this explanation of Bad Faith in commercial transactions from WP supports the above opinion.

We shall see how the courts rule in the matter ... if they rule in the matter.

[german_reader]

@Ismail, Fred, Lafayette ( I know it's pointless ),

homeownership rates don't say very much about the economic strength of a country. Homeowner rates in countries such as Italy, Greece or Spain are high, despite often somewhat weaker economies. On the other hand the homeowner rate in Switzerland , which has a very strong economy and high real wealth, is relatively low. I don't the exactly the reasons for Switzerland, but I can name some of the reasons for neighboring Germany, which has a similar culture and a comparable homeowner rate ( 42.6% in 2002, 44.6% in WestGermany, 34.2% in EastGermany ). Most of these reasons might apply to Switzerland as well.

First of all there is the demographic structure of a country. The average household size in Germany is 2.1 persons compared to 2.6 persons in the U.S.. The United States has more family households ( and children ) than Germany, Germany more one or two person households than the United States. With a comparable household structure as in the U.S., Germany would have around 31.6 million households instead of the 39.1 million it has now. That alone would push the home owner rate from 42.6% to something like 52.7%, presumed that the absolute number of home owners would remain the same ( 42.6% of 39.1 million = 16.66 million = 52.7% of 31.6 million ). On top of this one or two person households in general might be less motivated to buy a home and settle down permanentely than families.

A second reason is debt and the availability of cheap credit. Total private mortgage debt in Germany is around 1.1 trillion euros ( $1.7 trillion ) or 45.4% of GDP. In the U.S. private mortgage debt in 2007 was $10.5 trillion or 76% of GDP. That's in relative terms 67% more than in Germany, while total real estate value - adjusted for population size - is nearly the same. As a consequence American home"owners" own on average only 47.9% ( U.S. Flow of Funds Account, table B.100 ) of their homes, compared to more than 75% in Germany. With a similar debt burden as in the United States, the homeowner rate in Germany could probably rise by at least 67% or from 42.6% to 71.1%, higher than in the United States ( as far as I know around 68% ). The effect would be even more extreme with a debt levels as in the U.K..

It's seems as if it's not mainly higher incomes, but cheaper credits and less restrictive lending standards, which are the driving forces behind the higher homeowner rates in the U.S. ( and the U.K.).

Another possible reason might be population density. Germany is more than seven times as densely populated as the U.S., Switzerland around six times. That drives up the average price for land and makes especially single homes more expensive ( and explains perhaps the higher house prices and higher mortgage debt levels in the U.K. compared to the U.S.).

And not at least the legal protection of renters and rent levels. In Germany the legal protection of renters is pretty good and rents in most regions are moderate. The risks to lose your home or face dramatic rent increases are quite low. That diminishes the incentives to buy real estate. Both seems to be less advantageous in the U.S..

[reason]

Lafayette...
Unless I'm missing something, you seem to have ignored second order effects. Any subsidy will increase demand at a given price and so drive up the price. This is basic economics (and basic tax incidence logic - except with a subsidy in reverse).

[reason]

I'm a bit OT here of course - the real question is whether the state should deliberately promote home ownership over renting. The only good reason for doing this that I can see is that it is a way of spreading wealth. Except that it doesn't work. Eventually most people end up with very unbalanced asset portfolios and large debts.

[Lafayette]

Blissex: Despite the whining of the victims of coerced financing of the cadillacs for the welfare queens and of the t-bone steaks for the strapping young bucks,

It is such bliss to see your racist comments.

Why not comment in another forum to see if we're not there? For instance, this one ...

[piglet]

The idea that home "owners" are better people (and that is what the "ownership society" really amounts to) is once again a particluarly American idea. Not that other countries don't also promote home ownership; Germany has done so for many decades, with tax advantages and special mortgage institutions called Bausparkasse (however, as I understand it, the tax advantage really promotes saving - home owners as such are not privileged). But Germany also has elaborate regulations that protect renters. Both renters and landlords know their responsibilities and by and large abide by them. The idea that a home isn't a home just because it's rented, and that it's okay to neglect it or abuse it as you might abuse a rented car (hello?) is completely alien to millions of renters in Germany and elsewhere.

I often hear the argument - here in the US, that is - that owners take better care of their home than renters. To that I have to say, excuse me, those rental homes do have owners, they are called landlords. Who prevents them from taking care of their property?

Since we have entered the game of international comparisons, it surprises me that nobody has mentioned price as an obvious factor. The median home price has been $231k lately, that is about 150k in Euros. What house do you think can you get for that price in Germany or Switzerland? Forget it!

Most American observers will praise the relatively low cost of housing in the US and call it a success but as always there are downsides. Cheap houses are a result of low building quality (German or Swiss houses are built of masonry and have state of the art energy efficient windows, etc.) and of cheap land due to suburbanization, which imposes a huge (external) cost on society as a whole that will have to be paid sooner or later. And the low building quality causes another problem. How can you treat houses as investments if they don't last more than a few decades? There's a case to be made to treat houses as commodities rather than as assets. That would pull the rug out from under the "ownership society".

[piglet]

Since several commenters have claimed that the tax subsidies for home owners benefit renters as well, for the record this is complete bullshit. Only owner-occupied housing is privileged, and don't forget that only those in high tax brackets with expensive houses benefit substantially from the tax break. The tax break mainly is an incentive to buy a house bigger than you need, more expensive than you can afford. As I see it, it does not substantially promote the creation of housing space per se, certainly not of affordable housing.

says...

Fred: "So how do you explain the situation in Switzerland, with 40% home ownership rates? Switzerland has got to be one of the most conservative cultures on this planet, in the old-fashioned sense of the term conservative: stick-in-the-mud, unwilling to change, revering the past, suspicious of all innovation, etc."

I have to tell you a little secret about Switzerland: about 20% of its residents have no citizen rights, and they tend to have lower incomes. The home ownership rate is probably higher among Swiss citizens than among the population as a whole. There is no doubt this imbalance favors political and economic conservatism, just as the low voter turnout among the poor in the US does.

To be fair, Switzerland is in some respects quite progressive. Public infrastructure, especially mass transit, is exemplary, renters have excellent protection, agricultural policy is very environmentally friendly, and they even introduced universal health care as "early" as 1996. There are quite a few parallels between Switzerland and the US. The Swiss federal system was actally modeled on the US, giving conservative, rural states disproportional power. But the Swiss are aware that theirs is a small country that needs to be well taken care of.

[piglet]

My post.

[german_reader]

piglet...

"The median home price has been $231k lately, that is about 150k in Euros. What house do you think can you get for that price in Germany or Switzerland? Forget it!"

Depends on the region. In rural Northern or Eastern Germany you can find good houses for this price ( at least better than the "median" U.S. home ). In Southern Germany it is as you say: Forget it!

And converted for Purchasing Power $231k are around 202k euros. Makes look things slightly better ( but even that is small money in Southern Germany ).

[Fred]

I'm actually quite aware of all these facts about Switzerland, and Germany too. The point is this: a high home ownership rate isn't necessarily correlated with the attitudes Blissex described, nor is a low ownership rate necessarily correlated with the opposite attitudes, whatever those might be. People can see themselves as "stake holders", and hence desirous of keeping what they have, which is the essence of conservatism in the old-fashioned sense of that word, in many other ways than owning property.

An interesting fact: back in 2002, when I was still living in San Francisco, there were only 2 groups of people in that city who were vocally in favor of war. The Chinese-American bourgeousie (the same crowd which is always in favor of building new expressways that everyone else in San Francisco is vehemently opposed to), who have a fairly high home ownership rate for San Francisco, and the homeless, who by definition don't own homes or anything else that they can't store in a shopping cart. That's right, all over you had these homeless bums heckling the anti-war protestors and holding up hand-made posters urging a war on Iraq, on the grounds that they wanted revenge for the 9/11 bombings. Maybe home ownership in some situation increases support for right-wing policies, but it sure isn't the only way to do this.

[Lafayette]

Blog pollution

Fred: Maybe home ownership in some situation increases support for right-wing policies,

Wherever do you concoct his stuff?

Pure drivel.

[piglet]

There may very well be a (positive) correlation between conservatism (in the economic sense) and home ownership but there are confounding correlations with wealth (positive), and with urbanity (negative). You'll have to do some number crunching to figure out whether home ownership is really a factor. I guess it depends ;-)

I am curious whether Fred's story about the homeless in San Francisco is more than an anecdote. It is conceivable however that a group that has nothing to lose and is at the bottom of the social ladder would be willing to support foreign military adventurism (which, after all, is not a "conservative" policy in any normal sense of the word). Athenian maritime imperialism was, in part, based on the political empowerment of the lower classes who were willing to risk other people's wealth for the prospect of benefiting from war bounty (they did, however, risk their own lives too). Conservative, aristocratic Sparta was happy to stay close to home and dominate only a few neighbors. Whether that teaches us about 21st century American imperialism, I do not know, but it sure is interesting.

[german_reader]

I've mentioned in a comment above that more private mortgage debt is probably one of the reasons why the homeowner rate in the U.S. is higher than in Germany or Switzerland. The "owner equity as a percentage of household real estate" in the U.S. is much lower than in these countries. Here is an interesting article from U.S. economist Dean Baker:

http://www.prospect.org/cs/articles?article=the_meltdown_lowdown_061208

He writes that:

"The Federal Reserve Board released new data last week that showed that the ratio of homeowners’ equity to the value of their home (in other words, the share of the home that the homeowner owns rather than the bank) fell to 46.2 percent in the first quarter of 2007, the lowest level ever. This ratio had never been below 50 percent until last year, and it was typically around 67 percent through the 50s, 60s, 70s, and 80s....

Roughly one-third of homeowners own their house outright (they have paid off their mortgage). If the paid off houses cost as much as the average home (they actually cost somewhat less), then for the two-thirds of homeowners with mortgages, the average ratio of equity to value would be close to 20 percent.

But wait, it gets worse. The Fed’s data is based on the Office of Federal Housing Enterprise Oversight’s House Price Index. This index shows a substantially slower rate of house price decline than the more broadly constructed Case-Shiller index.

If we used the Case-Shiller index to measure the change in house prices since 2006, then the ratio of equity to value at the end of the first quarter would be close to 42 percent and the average ratio of equity to value for those with mortgages outstanding would be less than 14 percent. And of course prices are still falling."

In other words the owner equity rate in the U.S. was much closer to Swiss or German levels before the general debt rally in the U.S. started at the beginning of the 80s. It would be interesting to know the homeowner rates during these decades.

I think, if the U.S. government really wants to support homeownership, it should consider some form of directly public subsidied house building. That might be better than to leave it to the markets alone. This seems to be mainly a secure way to create new business for the financial "industries" and leaves obviously many "homeowners" ( holders of mortgage debt may be a more accurate expression ) in the rain.