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Monday, June 23, 2008

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.

    Posted by on Monday, June 23, 2008 at 12:33 AM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (69)

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