Homeownership, an engine of inequality?

Photo credit: Damon Cesarez for the NY Times

This is one of the more interesting articles that I’ve recently seen. The author argues that homeownership has been one of the biggest drivers of inequality. Americans have most of their net worth in homes, and government incentives, such as housing loans and the mortgage interest deduction (MID), help people buy homes and artificially prop up housing prices.

I appreciated the history, but I’m not sure how much I agree with the opinions raised in this article. There are lots of benefits to owning a home. You can’t be evicted, a landlord can’t raise your rent, and you have a place for your family to live. Owning a home allows you to begin building a stable life for your family. You are guaranteed access to the schools in your neighborhood, and if you live in a neighborhood with good neighbors, you benefit from the social aspects. Homeownership also improves neighborhoods themselves. When people have an investment in a location, they tend to take better care of it.

But homeownership as a financial vehicle? The benefits are there, but there isn’t nearly as much upside as people think. I think it’s overrated. For example, my grandfather bought his house sometime during the 1950’s. It’s now worth over twenty times what he paid for it. On paper, it looks like he made a killing. But he will never see a penny of that money unless he sells, which he can’t do, since he needs a place to live. He paid it off rather quickly, so he hasn’t benefited from the MID since…well, since before I existed. So yes, his home has technically been a tremendous engine of wealth building. But it’s money that he will never see. Now of course one might argue that he could pass it on to his heirs, and there are good arguments that support that idea. That’s true, but it’s also true that his heirs still have to make do for most of their lives without that money. If the average natural life expectancy is 80 years, and if we assume that most generations are, say, 25 years apart, a normal middle-class or even upper middle-class child has to support himself at least until the age of 55. I think the greatest financial benefit of homeownership is probably the fact that you don’t have to pay a landlord who (according to the rules of economics) has to charge a rent that generates a profit after the principle, interest, taxes, insurance, and maintenance.

Eliminating the MID would be a big mistake. It would make it harder for people to own a home. I’m guessing that most homeowners have families. Sure, poor people don’t benefit from MID and support for home loans, but that’s because poor people don’t have enough money to afford homes or to qualify for loans, with or without government assistance. The answer isn’t to increase the burden on middle class families so that more middle class people go poor; the answer is to lift more poor people from poverty so that they can afford homes.

In any case, I think the biggest driver of inequality is jobs. Jobs and education. Even if a person owned the home that my grandfather bought during the 1950’s, the amount of appreciation of that asset would pale in comparison to the money that would come in from a good paying job. Look at the first family in the article. They can afford a $600k home because they make $290k a year. They don’t make $290k a year because they bought a $600k home. They make $290k a year because of their education and work (and probably some lucky breaks that all of us get).

Anyway, enjoy the article.

7 thoughts on “Homeownership, an engine of inequality?

  1. Let’s go back to Math101: 1 percent of $100,000 is less than 1% of $200,000. OK. Now rich people can afford bigger loans to buy bigger houses, so in the end the MID saves them much more actual amount of money than it does to poorer people. The rich benefits the most, and yes MID drives up the housing price, further preventing poor people from ever owning a house.
    Now let’s go back to Finance101: DIVERSIFY. Smart people don’t put all the eggs in one basket. They don’t put all their money in 1 house, or many houses. They invest in different things, not just the housing market. That’s why your grandpa’s offspring can’t benefit from housing value appreciation, because they cannot securitize it and sell tranches off.
    Now let’s go back to Economics101: Who do you think is paying for the MID ? It’s you with your tax money. The government gotta make up for loss revenue from MID right? So they increase other taxes, or reduce other benefits. MID is just a political tool because it sounds “good” to an ordinary idiot voter. In the end you pay for MID, but in another form, from either tax increase or benefit reduction. Ok so you think it’s fair to homeowners because it’s a zero sum game, but it’s not a zero sum game. You benefit from the poor again. Why? Because poor people got their benefits reduced anyway even though they don’t own a home, to subsidize your overpriced houses.
    To sum it up, MID is just another scheme to benefit rich people by spreading their expenses to society. It’s like going to a restaurant with a group of people, some order Filet Mignon with lobster tails, some order general tso, some order water, but the check is split evenly.
    And the black family make that much money because they’re black, so “equal opportunity” gets them hired. They are over compensated for their work quality, and society as a whole pays for it. This works similarly to affirmative action that you know very well Byron.

  2. As a way to increase wealth, I think it depends. If the value of your home increases, and you’re willing to either downsize (because your kids moved out) or move somewhere that isn’t as hot, you can make a decent amount of money.

    Also, if you’re able to find a way to monetize your house by renting it or even a portion of it, it can be a good investment. I know some people are making a killing with AirBnB for example.

    There’s also always the fact that you’re not paying rent to someone else, but investing in yourself.

  3. I agree, I don’t see your primary residence as a good investment vehicle. It is a good hedge. It is a good rule of thumb that you cannot deduct your way to wealth. The article is most likely right that the MID does help boost home values, but there are too many other things at play when it comes to inequality.

    It mentions that home ownership plays a role in the wealth gap between whites and blacks/Latinos. While I agree with it, you have to take into consideration both financial position and net income. Having a house provides an asset, but it will also come with higher expenses. For a comparable house, a mortgage should be less than rent, but the rent prices in a lot of expenses not included in the mortgage. If you own a house, you still have to pay for those things, otherwise your house’s value will decrease.

    In the end if you buy too much house for your needs, the expenses associated many not be worth the value of the asset. If you buy a 4000 sq ft house vs 2000, you have to pay for the extra utilities, extra repairs, and extra furniture. If things are outdated you have more to update. Heck, if you live in an more affluent area, it cost more to keep up with the Jones. The MID savings and extra home appreciation is a pittance compared to what you wasted in expenses unless that is really what you wanted. You could have put that savings elsewhere.

    Also I don’t know what they mean by inequality. Is it wealth inequality or income inequality? The two are different things. Wealth inequality cannot be fixed by the government like the author suggest. It is like the rule of thumb for losing weight, you need to burn more calories than you consume. While this is too simplistic, it is easy enough to say if you consume 1,000 calories more than you consume, you will gain weight. Likewise no matter your income, if your spend more than you make you will dissipate wealth and not accumulate it. The MID isn’t going to matter.

  4. Also the article mentions that the left tends to blame some of the problems on inequality on structural problems, like movement of jobs, and the right on individual decisions and divorce. Both of these are important, much more than the MID. How can you know if your neighborhood will become blighted in the next 20 years?

    Divorce also hurts equality. It is so much more efficient to have two adults working towards the same goals in the same home when you have children. If you divorce you have two incomes in two households, with one parent overburdened raising the children in a single parent household. You might even have both parents taking financial harm in order to get back at the other parent. Keep this in mind when looking at household income over the years. This can be hidden in the data.




  5. Yeah, you know, I’m beginning to wonder about the whole “investment” thing.

    Let’s say you get a 4-year undergrad degree plus four more years to get your Pharmacy degree at a state school. Looking at the costs:

    If you don’t qualify for financial aid, it’s roughly $200k altogether. But that $200k enables you to make $100k right off the bat, with the ability to go up to $250k or beyond. If the average non-college grad starts at $40k, you’re pulling in an extra $60 your first year. Even assuming (which is not a good assumption at all) that you stay flat, you’ve paid off your education after just four years. Now let’s say you follow a normal trajectory and make, I don’t know, $150k a year after five years. You’re pulling in an extra $100k compared to what you would have ordinarily made. Even if you deduct taxes, you’re still doing great. How many investments can you make that will pull in a steady and reliable $100k a year? Unless you start with a lot of money, there aren’t many investments that can generate that kind of return. Never mind the MID, which isn’t even an investment.

    Now of course, there are some “structural” advantages here too. If you’re a pharmacist, chances are good that you can live in a neighborhood that isn’t dangerous. You are less likely to lose money or quality of life because people in your neighborhood don’t tend to sell drugs or commit violent crimes. You get to network with people who have money, and therefore you become more aware of better opportunities for your family.

    But none of this really started with an investment in property or stocks. It started with an investment in education.

  6. Well, one thing is that a lot of older people (particularly in colder climates) will sell their homes and move to a place that is smaller (easier to maintain) and in a place where home values are cheaper. In this way, they can profit quite a bit from their accumulated equity.

    Another thing is that a lot of older folk end up paying less for their mortgage payments for a nice house than most young people are paying for their crappy apartments (that they have to share with 4 other people in order to afford.)

    And, of course, the children and grand children often inherit wealth. So it’s a way for families to pass down wealth to their descendants.

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