For generations of Americans, It's a Wonderful Life pretty much sums up the benefits of home ownership. George Bailey takes over his father's savings and loan in Bedford Falls, builds Bailey Park, an idyllic affordable-housing development, and issues mortgages. In the alternative universe where George never lived, there's no savings and loan or Bailey Park; the townspeople have fallen into debauchery as tenants of the usurious Henry Potter; and quaint Bedford Falls, now renamed Pottersville, is home to sleazy nightclubs and pawnshops.
Director Frank Capra's vision has dominated public policy ever since. Republicans and Democrats have competed to extol home ownership as a sound investment and source of moral virtue, stability and community.
Growing up in the small-town Midwest of the 1950s and '60s, I never questioned those precepts. In my family, mortgage payments were a sacred obligation. The idea of "throwing away money on rent," not to mention being beholden to the whims of a landlord, seemed anathema. The few neighborhoods where people rented were indeed shabby. After I moved to New York City, it took a decade of savings, but as soon as I had a down payment, I bought an apartment.
In the wake of the real estate bubble and collapse, all of these assumptions have been called into question and in some cases, are under attack. Decades of policies designed to foster home ownership are being reexamined, from taxpayer support for the giant mortgage agencies to the tax deduction for mortgage interest. In light of this sea change, I decided to reapproach the sacred cow of home ownership with an open mind. Does it make sense financially? Does it promote social benefits?
In some cities, the past decade has been brutal for homeowners. In Atlanta average home prices this year are the same as they were in 2000 11 years ago according to the Case-Shiller home-price index. Nationally, the rate of appreciation in housing seems likely to return to its long-term historical average, which is only slightly higher than the rate of inflation. Purely as an investment, residential real estate is never going to outperform the stock market or many other asset classes.
Nonetheless, home ownership has historically yielded other financial benefits. "Over 75 years the mortgage system is how the middle and lower-middle class accumulated capital," John Quigley, a professor of economics at the University of California at Berkeley, told me. "It was a system of forced savings rather than an investment per se. It was never intended to triple your money in three years."
For the most part, the system worked as intended, enabling Americans to accumulate wealth, put their children though college and retire comfortably. Returns were enhanced by the leverage provided by the mortgage as long as housing prices rose. But as with any asset, leverage can also magnify losses. No one can borrow 80 percent of the price of a stock, yet that amount of leverage and even more became routine with real estate. In the wake of the housing collapse, that notion is being reexamined. "People have not ascribed enough of a risk premium to the leverage," says Christopher Mayer, professor of real estate at Columbia Business School.
Today, the answer to the question of whether a home is a good investment may well be "not always," according to Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Policies that increased home ownership created what Gabriel calls "transitory owners," who ended up suffering defaults, evictions, foreclosures and other financial disruptions. "Policy that creates only temporary home ownership is bad policy," Gabriel adds.
If the financial benefits of home ownership seem elusive in some circumstances, the social benefits are even more so. When it comes to promoting stability and other social benefits, nearly every economist I interviewed agreed that it's difficult if not impossible to separate home ownership from other variables that correlate with desirable environments, like affluence and levels of education.
The home ownership rate in France is 57 percent; in Germany, 46 percent; and in Switzerland, just 37 percent. By comparison, it's 67 percent in the U.S. Housing is only one variable, of course, but no one would argue that communities in France or Germany are less stable, less cohesive or more unkempt than those in the U.S. Zurich and other cities in pristine Switzerland are a far cry from Pottersville.
Once you question the notion that everyone should own a home, the policy implications are significant. As Mayer says, "Too much of current policy seems aimed at promoting consumption of housing ever larger and more lavish homes rather than ownership itself." All the economists I interviewed criticized the mortgage deduction as needlessly benefiting affluent taxpayers (most low-income taxpayers don't itemize, so they get no benefit). Most agreed it should be phased out, perhaps over 15 to 20 years to minimize the effect on housing prices.
But they also agreed that there's a place for some government support for home ownership, primarily as a way to promote savings. Warren Buffett, who has lived for more than 50 years in a home that cost him $31,500, made a resonant comment on this issue in his latest letter to shareholders of Berkshire Hathaway: "Our country's social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford."