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.