The American Dream is predicated on the idea that people who work hard and follow the recommendations of the social consensus will be rewarded with prosperity. And what is the ultimate symbol of that prosperity? Owning your own home.
But the premise of the American Dream is getting shakier by the year. The United States has become a starkly unequal plutocracy whose class structure is far more calcified than social democracies in Europe. Still, even though the fact of inequality has become widely accepted, the aspirational creed of homeownership remains woven with the idea of America itself, both in terms of policy and culture.
And that needs to end, as soon as possible.
Homeownership has long been the way American society has divided itself into a responsible, stable bourgeoisie (owners) and an undisciplined rabble (renters). The divide used to be along stark, overtly racial lines, enforced by white supremacist terrorism, but nowadays the distinction is a bit more subtle.
Traditionally, we've promoted homeownership by making houses the primacy vehicle for middle-class savings. The problem is that a house is a crap investment.
Just think about it: Why wouldn't it be? It's only land plus a big durable good. Houses don't increase in productivity to provide more sheltering services; they just slowly fall apart. If median-income people borrowed hundreds of thousands of dollars to speculate on the price 30 years hence of a single, highly illiquid asset that wasn't a house, they would be called financially insane.
And yet, people still say "homes for the long term." Catherine Rampell had a nice piece on how most Americans, even after a world-historical recession driven by a collapse in home prices, still think that buying a house is a great financial decision:
Gallup asked Americans this month to choose the best "long-term investment." Real estate was the most common pick, ahead of mutual funds, bonds, and other options. Similarly, Fannie Mae's National Housing Survey asked Americans to assess whether various kinds of assets amounted to a "safe investment with a lot of potential." As has been the case since before the financial crisis, "buying a home" beat out all the alternatives.
The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. [The Washington Post]
So why do people think this? That's where the policy comes in. As Matt Yglesias points out, it's the subsidies! There are two methods by which the political system has transformed what would be bug-eyed lunacy for any other investment into a kinda-sorta safe bet (except, of course, for when prices collapse and blow up the economy).
First, demand is upped by directing mountainous subsidies toward homeowners. The most prevalent is the mortgage interest deduction, which racked up a bill of $100 billion in 2009, but there are also other, more subtle subsidies provided by federal mortgage insurance agencies and the federal mortgage-backed security agencies.
Second, there are thousands of local supply-side constraints that drive up the price of housing. Combined, these two factors have successfully put enough price pressure on housing that (historically, at least) ownership has paid off.
This is pernicious for all kinds of reasons. The vast bulk of subsidies go to the rich. Restricting the supply of housing increases the cost of renting. Homeownership curbs geographic mobility, which has also been shown to discourage class mobility. In the wake of the financial crisis, millions have been stuck with an underwater mortgage. And needless to say, allowing ungodly amounts of mortgage debt to swim around the economy only tempts the financial sector to make the riskiest investments.
Most of all, though, there is simply no reason for homeownership to occupy the cultural perch that it does. Renting is just as legitimate a form of paying for shelter as buying. It's time to let that malignant symbol of the American Dream die a quick, quiet death.
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