The case against homeownership

New York Times columnist Paul Krugman writes one of those "Tipping Point" columns today that speaks volumes about the shifting debate about housing in America. His point? Homeownership is overrated and over-supported by the federal government.

Highlights: "Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?... 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.... 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."

Krugman points out the rarely mentioned economic risk of buying a house -- losing money in the short term. He guesstimates that 10 million American households are upside down in their mortgages right now, owing more than their homes are worth.

Definitely worth reading, if only as a reminder of how conventional wisdom can shift by 180 degrees:

2002 Conventional Wisdom: Increasing homeownership levels is a good government policy and lenders should be encouraged to find ways to lend to people who have less-than-good credit.

2008 Conventional Wisdom: "There are some real disadvantages to homeownership," as Krugman writes today.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: Los Angeles Times

Comments

[Mark]

People who rent rarely have a vested interest in the long term well being of their neighborhoods or city.

I know, because my veiw of things changed 180 degress when I went from a renter to a home owner.

[LA]

The Swiss, who know a thing or two about wealth, aren't all that keen on homeownership, either. I was told during a vacation in Switzerland that most Swiss are lifelong renters. That may have something to do with European build-out and the efficiency of communal living in cold climates, but it may also indicate a mindset different from ours - that one's home is not an asset. I like Robert Kiyosaki's way of looking at it: if it costs you money every month, it's not an asset, it's a liability.

[Jacinto]

The tax deduction for mortgage interest is not allowed in other developed countries, e.g. Canada, UK, Australia, nor are gains from selling the residence exempt from tax up to $500k (plus their usual loan terms are inferior to ours). Yet most of those countries have about the same percentage of renters to overall households as US does.

So, it isn't clear that US law supporting home ownership is creating a "stable society of owners" but instead looks like it is doing the reverse by turning the personal residence into an investment in the minds of many people.

Our statesmen at least should roll back the interest deduction, maybe turning it into a 15% credit with an annual cap, that way they stop subsidizing affluent people with large houses. Maybe also they should make it harder to qualify for the $500k gain exclusion, to discourage short term investors.

[RZ]

I agree that home ownership isn't for everyone. However, one strong reason for home ownership is that if you are able to pay it off before you reitre, you'll need less money in retirement because you won't have mortgage payments. This would stretch your retirement money, which in most cases will be much less than your salary, much further.

[TakeFive]

These kinds of either/or arguments are silly. Sometimes renting makes sense, like for a reporter that gets reassigned every few years. But if you have kids and need long term residency in a good school district, ownership might work better.

“…a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups.

This is where Krugman missed the real story. After decades of hearing that minorities were denied loans or charged higher interest, not because of poor credit, but strictly because of racism, we can now test this assumption. Billons of dollars have been spent on this experiment to see what happens when you give lots of money to people with poor credit. Any guess how it will turn out?

[Wonderwood]

Here's the latest in the series of things the Baby Boomers are denying my generation. Home ownership worked for everyone before their greed gamed and busted the system. Now they want to tell us that owning a home isn't that great anyway - easy for them to say. This kind of thinking is just another way to keep us in a permanent state of adolescence - these Boomers just can't let go of anything. Old People - if you really want to help this country out - retire, and sell your home at market value. Otherwise, I'll be starting my family when I'm 40.

[Rob Dawg]

Owning, $100,000 down and $2000/month after taxes versus renting $3000 down and $1500/month. This is the unlevel playing field that needs to be corrected more in favor of renters?

[Rich]

Maybe we should tip that argument around a few degrees and ask the question, why were the WWII generation so anxious to get out of renting and own their own homes back when renting was the norm? I'm supposing it has a lot to do with autonomy, not being at the mercy of somebody else to take care of your environment, and economy--when chosen properly on the basis of price, owning will build equity that renting doesn't, at least for a generation that didn't have ready access to other kinds of investments.

If the government did away with the mortgage interest deduction it would be a big blow to the real estate part of the economy, probably resulting in long-term job losses and a severe decline in home prices. At the same time, the properties suitable for rental would be inadequate for the new demand from people who could no longer afford mortages on starter homes; the contraction and realignment of the economy from single-family homeownership back to high-density rentals would be an expensive and socially transforming event. It would turn us back to a nation at the mercy of landlords--not a prospect most of us look forward to.

Any tinkering with the mortgage interest deduction would have a drastic effect on the status quo, so think carefully about what kind of opportunities you want to have for your own future before jumping on that bandwagon. Too many Californians living in their bubble market are willing to trash the system just because their own local part is temporarily broken. Ownership does create a sense of responsibility to one's own environment and community that renting from a careless landlord doesn't, and that's a social experiment I'm willing to see continue...

[Laker]

Other than being super liberal, Krugman is a very smart guy - we should listen to what he is saying.
I tend to disagree somewhat (and it might surpise shockg)

I think that Increasing homeownership levels is a good government policy....AS LONG as the government is working to increase the wages of the people, increasing the purchasing power, increasing the education level of the citizens while NOT inflating or devaluing the currency and decreasing the cost of living and increasing the quality of life while NOT increasing taxes. All these are good, and if government wants to do these and therefore increase the level of home ownership, i'm all for it.
Putting people into mortgages that they can't afford over long term, propping up house prices and driving them to be unaffordable, bailing out lenders and speculators, reducing interest rated and creating inflation and bubbles in commodities, allowing people to get into houses "temporary" by using exotic loans that cannot sustain low interest rates or even giving FHA loans with 0-3% down allowing "no skin" in the game for those buyers - provide incentive to default as there is nothing to lose here...

[Kaye Thomas]

I agree that not everyone should be a homeowner. Owning a home is a responsibility that requires a large commitment from a consumer. Renting is a better choice for those who don't want the responsibility or are not financially in a place to take on the responsibility

However what always seems to come up in these conversations is how unfair it is that owners get certain tax write-offs. But I never see any talk about renters picking up some of the tax burden if the incentives are taken away from homeowners.

One of the reasons homeowners receive incentives from the government is that the property tax is the main base of income for most state and local governments.
If you are a renter you don't pay to support schools, fire, police or the infrastructure.. sewer lines, roads etc.. that is all on the back of the homeowner.

[Laker]

Kaye Thomas wrote: "... If you are a renter you don't pay to support schools, fire, police or the infrastructure.. sewer lines, roads etc.. that is all on the back of the homeowner...."

WRONG. Kaye Thomas, renters pay property taxes albeit to the landlord and not to the county/state. Rent includes property taxes as well as upkeep and insurance.
The fact that you don't see it on a statement does not mean it is not there...Rest assured no landlord would like to pay taxes from his pocket and letting your rent "only" cover the mortgage... Now today, you might find many landlords that are doing that...but that only shows that they were stupid buying houses to flip and got stuck holding the bag. If Rent for a property is not equal or higher than PITI + upkeep + normal return , it is bad to be a landlord.

[TomServo]

Uh, no. Somebody is paying that property tax (the property owner, or landlord), and the renters are paying the landlord. Transitive property... renters are paying their fair share of property tax. Fail.

[Ragnar]

Peter, can we change this all italics font? It's a bugger to read. Also, new LA Land blog post headings are not being updated on the main LA Times Real Estate page, http://www.latimes.com/classified/realestate/
"Making the housing-gas price connection" is still listed as the most recent post. Thanks!

[MyLessThanPrimeBeef]

There is something very primitively satistfying, buried deep down in the reptilian, R-complex part of our brain, about owning your own corner of the hunting and gathering turf, as every red-haired, red-blooded Neanderthal will tell you: he can only have his peace when he gets his square mile of so of roaming space.

He is not going to be happy thinking, yup, I am only renting this freshly coated green valley, with no Mello-Roos, free trash, free water from that weird Cro-Magnon cave painter (artist, yuck!) over the hill and I have to return it to the skinflint in the same, original condition or otherwise I don't get my deposit of the finest Solutrean Stone Age flint tools back.

No, he wants it for himself without anyone telling him wethere it is OK or not to keep wailing hyenas as pets on the property or his kids to practice shooting poison arrows. He just doesn't want to have to pay an arm and a leg for it.

[Cal]

Kaye,

You have really outdone yourself this time.

[LeftLA]

Wonderwood: What a crybaby punk you and your cohort are. Content to blame the rest of the world because you don't have the ambition, drive and creativity to go after what you want. You are a bigger threat to the future of the country than any Boomer. Without your hated Boomers, you wouldn't have computers, cell phones, video games and iPods to use to hide from responsibility and the hard work that will enable you to own a home when -- if -- you grow up.

[Nancy]

Kaye,

You forgot about sales tax.

Plus, who do you think is paying the mortgage when a landlord rents out his/her unit, and usually covering the cost of the mortgage payment and taxes?

That's right, the renter.

[Douglas Paulino]

Live on a big catamaran and travel all over the place from mainland Mexico, Southern California to Hawaii. Home ownership including all the taxes, principle, interest and insurance, who needs it. Granted, I pay taxes, insurance and mooring/slip fees when in town, but not like So Cal homeowners. The Great State of California has even figured out a way to tax the mud under my boat when tied up at my slip. They are so clever.

[tired of]

Wonderworld, stop whining and using the easy way out by blaming others. Seriously, most people we hear about in these FB buyer stories are about greedy gen x,y, and z people, such as Casey Serin -- not boomers.

You sound like you want everything handed to you on a silver platter. This is a free country, and no one needs to quit their job or sell their house just to help you out.

You need to get out there like everyone else and just do the best you can. Time to grow up and stop being a princess.

[sfvrealestate]

If renting makes more sense for you and your family, by all means rent. But please realize that you ARE paying a mortgage -- your landlord's -- and they are building up property equity instead of you, thanks to your monthly payment.

[Cal]

sfvrealestate,

Maybe you can explain the assembled peeps how you can be building equity while prices are falling.

TIA.

[Laker]

sfvrealestate, wrote: "...your landlord's -- and they are building up property equity instead of you,..."

Yeah just another winner from RE agent. Why don't you add that prices here in LA only go up, renting is throwing money down the drain...

When the mortgage is $4000, and the landlord rents the place for $3000 and the property is losing about $10,000-20,000 every month.
WHO IS BUILDING THE EQUITY?????
THE RENTER DOES! (in his bank account)

[manula]

re: the Swiss
Well they do know something about wealth: over time real estate as an asset class is just slightly better than precious metals (ie pretty dismal - recent runup notwithstanding). The things is, real estate is the only way for most people to build savings - banks will loan you up to 80% LTV (that is under normal market conditions). If you do have savings already and you don't think of yourself as some kind of Donald Trump in the making, then you should look at real estate as just another asset class, one which should not constitute more than 5% of your portfolio (per modern portfolio theory).

[tealeaf]

Let's get something straight:

"Buyers" RENT money from the bank in the form of interest.

They are not OWNERS until they have a deed in their hands, free and clear.

Until such time, they are RENTING money to eventually own a home, and as long as prices are falling, the couple hundred bucks principal a month (if they're not doing an IO) pales in comparison to the massive ongoing correction in asset value.

Now who is the "bitter renter?"

[Inland Empire]

Once again, we have some very short sighted people who think the current trend of decreasing value in RE will continue. It won't. Things will go back up, just as they always have. The ones who got in at the lower price range will be laughing at all the disgruntled renters.
In the past ten years, I have lived in three different states due to job transfers. I have owned at least one home in each of these states. I have rented in two of these states. One landlord angrily tried to get me to pay for the water bill that was incurred prior to my moving in or signing a rental agreement. Another landlord claimed he could not rent my unit out right away when we moved and thus kept part of my deposit. (not legal but when are you are more than 1000 miles away, its not easy to dash over to small claims court). Because we had people coming to our door daily asking about his rentals, that was a lie. He also decided that a paint defect the size of a pencil eraser on his toilet seat was something we should pay for. Another landlord jacked the rent up $50 a month after we moved in. Another one couldn't seem to get the septic tank fixed properly. That one refused to fix a leak in the waterline that cost more than $200 a month in water bills. (too high for two people and one dog who don't water landscape that was xeriscaped). Another landlord couldn't get anyone over to fix the furnace during snowy weather. Had I been in California, I would have known exactly how to remedy these situations but other states laws are not as helpful to tenants. Were these homes in some sort of run down area? No, they were all considered "upscale/above average" homes in so-called nice areas. These episodes alone have made me determined to never live in a rental again no matter where it is and no matter who owns it. So if you like the landlord dictating things to you, continue to rent.