Killing the Myths of Homeownership
Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society. Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.
Myth #1 - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.
ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”. A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.
Myth #2 – The mortgage income tax deduction is good for homeowners.
ABSOLUTELEY NOT! It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).
Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)
Myth #3 – Homeowners benefit from many social advantages.
Sorry but there are NONE and actually some social disadvantages, including worse sex. Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting. In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:
Recently published study by Wharton (Its a long academic study but just read the first paragraph)
The American McDream from the San Francisco Chronicle (renters have better sex, too)
Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)
How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)
The Advantages of Renting from National Public Radio
Myth #4 – The market is finally finding a bottom
Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.
Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)
Not exactly:
- Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
- Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
- Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.
See more myths in this follow-up post.
Got a really fucked computer? Get it repaired online at support.com
August 19, 2009 at 4:08 am
It’s all to do with the money “system” and how it works.
The division between the rich and the poor cannot be equitable because the very purpose of the money system is in the 180° opposite direction, so the system is claiming something like saying – “well, we’ll lower the temperature by raising the heat.” Hahaha, dhuhhhh.You can’t add by dividing, kids. It cannot work. It’s a con (assuming the bankers aren’t entirely gonzo).
In an economic system, where fiat money is fictional (presumably it’s “credit” but …) as production and commodities impacts the available money, it forces workers’ costs lower (surely!), while the profit of the others, — the “investors” and “bankers” who demand ever larger “interest” rates (un-like normal production, mind you) — increase inevitably towards infinity. Neither Zero nor Infinity are actually attainable, so there is always incremental wiggle-room for “growth,” or the inevitable fraud, in a fiat money system (heard of bailouts anyone?). The net result is . . . uhh . . . the poor get poorer and the rich get richer, but — and it’s a BIG but — the gulf between the two invariably grows constantly larger. It’s magic.
And that’s the problem. While people assume there is always the occasional glitch and the odd problem, they continue to claim that “progress” always will make it better. But it’s not. It doesn’t. Ever. It’s infinite.
As Robert Reich was saying, the money system is a sewer: “The problem is that the old economy was built on sand”.
http://robertreich.blogspot.com/2009/07/when-will-recovery-begin-never.html?ref=patrick.net
And he’s right. But I have seen his articles, his blogs, his web site, his books …. and I have never found the slightest notion that he might focus on the SOLUTIONS rather than the PROBLEMS. So the system is locked in — infinite.
So the problem, to me, seems to be about the humanity of people and the endless/infinite divide between rich and poor, because that’s what it is : perptual. I have studied money systems for 7 years, stretching over the past 5000 years of history, and it seems clear that every empire has always found a better shill, or a better trick to con humanity. What kind of contorted ghoulish humanity can possibly come of that?
BoB
August 12, 2009 at 2:25 pm
[...] and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market). For [...]
May 22, 2009 at 11:58 pm
[...] and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market). For [...]
May 14, 2009 at 1:18 pm
this whole debate gave me a bad case of gas. gotta go find the Beano now…
May 4, 2009 at 8:43 pm
[...] MORE Myths of Homeownership So my last article on the myths of homeownership was so popular I decided to produce a sequel. This is not so hard because there are so many. [...]
May 2, 2009 at 1:27 am
All problems solved with the simple “importation” of a Japanese-style “three-generation, 100 year mortgage” — but employing an added California twist to be known hereafter as the “California Twister.” **
** “California Twister” – simply “reengineer” the Japanese-style loan product into a “four-generation, 120 year mortgage.” For the most hardcore and stubborn situations (or for those who wish to take on a home price to income ratio of at least 20:1), just utilize the “California Twister-II” (a five-generation, 150 year mortgage” instead). See, that wasn’t difficult to effect — now was it?
April 29, 2009 at 10:55 am
[...] here (not so G-rated name), but it touches on some of the myths of home ownership that are valid. For example, the writer says it’s a myth to think that when you buy you build equity through f… ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. [...]
April 27, 2009 at 11:22 pm
An economic doomsday scenario to ponder:
- Joe and Jane figure out that paying the mortgage on a house that’s worth less than their home loan is financial suicide.
- Joe and Jane leave the keys in the mailbox and walk away from the house.
- Multiplying the Joe and Jane foreclosure scenario, 45 million times the median home loan cost of an American home and, oh boy… no government could ever back up that many foreclosures, let alone print that much money.
Please don’t tell Joe and Jane they can oh so easily walk away from their home.
Convince them that their credit score is far too precious, compared to losing tens of thousands of dollars on that thing they once called an investment (seriously overpaid framed wood and sheet rock at this juncture).
Tell them that losing money on a mortgage will never compare with the pride of home ownership! And since they are just a job loss or a health care crisis away from financial ruin anyhow…why not tough it out and lose any savings they might have on their home sweet home. (which is going to be foreclosed on anyhow?).
But no worries, Americans are too dumb to figure that out. Ignorance is bliss…
April 26, 2009 at 10:01 pm
[...] and lets not forget that the housing market that is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market.) For [...]
April 23, 2009 at 5:24 am
RE: Myth#1 – I know your point, and it is, of course, better for one’s budget to actually save for something than to purchase it on credit. The point, however, has been taken out of context, I believe, and is, rather, one of psychology: Most people (but definitely not all, I am a renting saver, for example) will spend any disposable income they see (pay cheque by pay cheque), whereas a mortgage payment will go out of their account prior to hem seeing their disposable income, hence, even though they end up paying more for the house, they manage to buy the house, rather than extravagant holidays, 200 pairs of Jimmy Choos, or whatever their vice is.
April 22, 2009 at 7:55 am
The home ownership advantage for me is about control of the property – the advantage isn’t economic. And if you are even tempted to move around more frequently than every five years buying a house is just stupid. Good article.
April 21, 2009 at 8:36 pm
San Diego renter-
There are increasing numbers of rentals popping up everywhere.
And Diomedes just made a wonderful point ! Mobility .
April 21, 2009 at 7:38 pm
Home ownership makes sense when the old parameters were met: large down payment, total costs no more than 28 percent of monthly income, additional cash in the bank for repairs/maintenance, and timely payment of taxes. The problem is that too many people overstretched for too much house, at too high a price, and took out rediculous mortgages to pay for it all. I saw a comparison of a massive 30-year note versus a 40-year note… the difference in monthly payments was about $150. If that small a number is a deal-breaker and you need the 40 year note in order to qualify, you should be prevented by law from even saying the word mortgage, let alone taking one on, because you will default in the future.
Property taxes are going to go up by huge increments in the near future to compensate for the trillions poured down the ratholes caused by foreclosures. And, as anyone in Florida can attest, the cost of insurance can be $500 to $1000 a month in some counties, effectively forcing oth.erwise sound buyers out of the market.
Ownership is fine as long as the real costs and benefits are taken into account. Renting is just as valid for most families as well. But don’t confuse renting with irresponsibility. Stretching to buy too much house, no matter what the cost, is the true measure of irresponsibility.
April 21, 2009 at 2:49 pm
Why do these arguments always overlook the fact that rent and a mortgage payment are not the same thing? Rent is the price you pay for housing. A mortgage payment is what you pay to acquire the asset a house represents.
When you are living in a house in which you have a mortgage, you get to live there for free. Maintenance costs are the price of maintaining the asset. When you rent, you do not (usually) pay that cost directly but, believe me, you pay it.
So, when Jdoubleu did his calculations, he forget to add the value of “imputed Income.” Okay, so we all know that imputed income is value received in some form other than cash. And, imputed income has the added benefit of being tax-free! So it is even that much more valuable.
There are all kinds of good reasons to not own a house. But there are also a lot of very good reasons to buy.
April 21, 2009 at 1:06 pm
Dang, you people don’t write comments…you write novels…
April 21, 2009 at 12:06 pm
I agree that there was a huge irrational push towards homeownership but there are also some scenarios where it makes sense. After months of debating the idea over and over again throughout this housing crash my wife and I finally decided to buy. Let me describe my situation:
- I live in northern San Diego (Mira Mesa specifically 92126 if you are curious)
- I work nearby in the high tech industry so it makes sense for me to live out in the much maligned ‘burbs’ to actually be closer to work
- I have a wife, daughter, dog, and we are expecting a second child soon
- Rent in San Diego is still ridiculously high. Google any rental rate statistics for the area and you will see rents have hardly budged since the start of the recession (depression?)
- I was paying $1800/month for a 2 bedroom apartment (slightly on the high side but it had a 1 car garage and pool)
- Single family home prices have fallen dramatically in Mira Mesa (like a lot of places in California). A house going for $450k-$500k in 2005 is now around $300k
- I was able to purchase a 1200 sq ft. 3 bedroom 2 car garage house for $300k which in my opinion still seems high after previously living in small city in the Canadian prairies but I have gotten used to the premium you have to pay to live in the golden state
- I bought using an FHA loan. I could have gone conventional because, yes I do have significant savings and I could have afforded the down payment but the FHA loan is transferable, offers lower PMI, and requires less of a down payment.
- I know everyone says you MUST have a huge 10-20% down payment but until the economy starts to recover I would much rather keep my down payment in the bank and if things turn around maybe I will use it to pay down the mortgage someday.
- Anyway, back to the numbers: My mortgage is 5.25% (soon to be reduced to 5% or less thanks to government bank bailouts) and all costs included (mortgage+PMI+home owners ins + property tax) it costs me $2173 (soon to be around $2100) per month.
- Given my tax bracket I expect to save about $100-$200 per month in income tax because of the ability to deduct my mortgage interest.
- So where does this leave us? $1800/rent and $1950/own (I used $2100 for mortgage and $150 for income tax savings)
- So it’s costing me about $150 more right? I must be stupid according to everything I read.
But there are other things that many don’t consider in home ownership.
I love fixing up houses, I am currently up to my elbows in home renovations and the place is looking great. Even if it continues to drop in price for a while I am adding significant value and I expect to keep my head above water.
Second, because rents are hardly budging(at least in San Diego), if I have to pack up and skip town with my family I can rent it out and nearly cover it’s payment (minus the $150 plus any maintenance costs). In my opinion this reduced the risk for me significantly. Yes I wouldn’t want to pay $150/month if I didn’t have to but it is definitely not a big enough anchor to keep me pinned down here should I lose my job.
Finally, I used to own a rental property in Canada before I moved to San Diego and I know from the experience of seeing my parents own rental properties that it is significantly harder to find a place to rent if you are doing the whole dog + kids, etc. thing. (Such as myself). Besides that it sucks to rent when that is your situation. The apartment we rented had white carpet in the dining room! can you imagine the anxiety while trying to teach your toddler to eat with a spoon in that type of place? I am just using this as an example but in our new house I have now installed laminate flooring in the dining room, something I never could have done in a rental house, and yes I know I could have searched for a more suitable place, but good luck being picky when you have a dog and kids in tow AND you want a place in a nice neighborhood close to work.
Financial aspect aside I think there are two key components to where you live: location and quality of the box you live in. Location needs to be the number 1 priority because the box can be changed. If you rent the box can’t be changed so the advantage goes to the homeowner.
Now I agree that during the crazy bubble the financial aspect obliterated any of the advantages I just went through above but I think before the bubble and now (at least we are starting to get to that point in some cities) the advantage is starting to swing in the direction of home ownership again (in some cases).
So the whole purpose of my gigantic post (I apologize sometimes I get a little wordy) is that the anti-homeownership crowd sometimes forgets that homeownership is a thing that many people enjoy and are willing to pay a bit of a premium for (as long as it isn’t excessive and jeopardizes their future). You pay money for things you enjoy (movies, etc.) why can’t some people pay a bit more then rent to enjoy the ability to fix up their house?
Again all things in moderation.
April 21, 2009 at 12:27 pm
Great comments and I think there may be a misunderstanding of the anti-homeownership crowd. Yeah there are some that are bitter and angry but the vast majority are not “anti-homeownership” they are “anti-homeownership bias”. Just recently the New York Times said that homeownership was the talk of the town (specifically the talk of New York City). In a city
To your point about moderation people should be free to do what makes them happy and society shouldn’t bias against “alternative lifestyles” physically or fiscally. Homeonwership is great but so is renting. It really just matters what you want in life. Vive le difference!
April 21, 2009 at 3:23 pm
You forgot to factor in 2 things:
(1) The $1800/month rent will go up year after year while your mortgage payment is fixed. (the property tax may go up but not at the rate your rent would). And if you stay in the same house long enough (and not keep doing refinance), you will eventually live there for close to free.
(2) Among the $2100 dollars you pay on mortgage, some goes toward the principle. So it is o form of saving. Not an expense.
April 21, 2009 at 3:40 pm
A few things you forgot:
- Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent.
- Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
- Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.
The simple answer is hard. Neither one is necessarily financially better based on a lot of “it depends.” Anyone who says categorically that owning is better than renting (or vice-versa) from a financial perspective is full of it until she actually runs the numbers. This argument is really a moot one until you are in the very specific situation.
April 21, 2009 at 5:17 pm
The time will tell if you made the right decision or not. pray to god that you or your wife does not loose your job
mark
April 21, 2009 at 11:39 am
I own a home but only bought it recently after years of saving and renting. Even though I own a home, I do agree that most of the arguments for homeownership do not hold water. Buy a home when you need the space and because you want it and it is a comparable price to renting. I am far wealthier not because I bought a home but because I rented for almost ten years and invested the difference (on what I would have paid on a house note).
A home is the crappiest “investment” on earth. Buy one to live in but if you bank on it as some kind of vehicle to building wealth, you’re only selling yourself short.
April 21, 2009 at 11:25 am
Actually to be fair, the Economist article poses the standard arguments for home ownership, but goes on to review counter-arguments. The overall tone, the way I read it (last week) is negative (toward ownership as being of any real value).
On the topic of social responsibility, my own feeling is that if homeowners where to suddenly become renters, no significant change in behavior would be noted; in other words, homeownership doesn’t insure a particular set of social habits only that people with certain social constraints or motivations feel obligated to own homes.
I also would second that as an investment vehicle, home ownership is not particularly good. Forget the illusion, long term, historic rates of appreciation on homes has just manage to nudge-out inflation. As the Economist article suggests, your maybe better off investing elsewhere.
On my own situation, homeownership limits other interests, financial and otherwise. It is ultimately a liability. I just don’t see the other arguments as countering that fact.
April 21, 2009 at 9:24 am
I’m a renter and a supporter of the cause. But I take issue with labeling “forced savings” a myth. The author’s argument is erroneous because it is premised on the incorrect assumption that homeowners cannot and will not resist the temptation to refinance their home and dig into their home’s equity.
April 21, 2009 at 6:08 am
Let me tell you this. I feel there is envy and hate rather than rational though coming from the anti-homeowner crowd. I own a home that is 80% paid for. Let me tell you this no renter will have what I have for the cost. Renters are paying off my rental property. So what is your advantage other than your envy at not having property. Have full children and let the adults own everything you rent.
April 21, 2009 at 6:20 am
Its not anti-homeowner. Its anti-irrational. Homeownership is NOT for everyone and society is paying a great price for the assumption that homeownership is for everyone. As a homeowner who apparently played by the rules and did it right you should also be angry at the irrational homeowners that have screwed up the housing market for owners as well. Instead of getting a nice rational and continuous rise in your housing value they put you on a roller-coaster that will now undervalue your house for some time. Oh and about your rental properties because of the overbuilding to meet this fictional housing demand the rents you charge are now falling AT THE SAME TIME as your house price. Clearly that shouldn’t happen as you would think rentals and houses are substitutes and a fall in one would lead to a rise in another.
Oh and if you are benefitting from renters maybe you shouldn’t be dissing them and callling them names. They are your customers.
April 21, 2009 at 7:36 am
Speaking of hate…your review of a nice little observation comes across as, well, a little bitter. As a previous homeowner of several properties, I sold my overvalued Santa Barbara McMansion in early 2006 and have been the happiest renter ever since, and will be for years to come. I currently rent a house in the Bay Area for $3k/month. It was listed for $1.3mm. Do the math on that rent vs. own calculation and let me know which makes more sense! Even with 20% down, I’m well under 50% in the rent v. buy ratio. To stay diversified, I still have a rental property in Texas, but in a market that saw far less bubble inflation–if any–according to the Case-Schiller, and in a place where, unlike California, rental income exceeds costs! Go figure! I love the flexibility of renting, the fact that the market for verrry nice rental houses is incredible for us, there are PLENTY of over-leveraged owners looking for someone to help cover costs, and that our cash is not tied up in this ridiculous market.
To each his own.
April 21, 2009 at 9:06 am
If response to your statement:
“So what is your advantage other than your envy at not having property”
I can answer that easily: JOB MOBILITY.
To draw from an example: Two of my close friends were recently laid off due to the massive recession that is hitting us. (Caused by a housing collapse by the way)
Of those two friends, one is a renter and the other is a home owner. (or home debtor if that drives the point home a little better)
The home owner has now been unemployed for 8 months. Why? Because he was laid off in an area where his particular field has taken a large hit. It is not that there are no jobs in his field per se, it is that there are no jobs THERE. And due to the fact that he is now entrenched in that area with a wife and three kids who have friends and neighbors they don’t want to leave, he is stuck.
Now my other friend, who rents, stayed unemployed for about 2 months. However, due to the fact that he was a renter, his job search was much broader. Thus, he was able to find a job in another state and simply picked up and moved. To another rental of course. (Note that he is also married and has one child)
The point is: our economy is not quite what it used to be when it comes to providing job stability. It isn’t like it was in the days of our parents when one could work for GM for 30 years in the same area and retire comfortably with a pension. The global village has made a requirement that people are far more mobile in their professions. I read a study recently that indicated that people will likely have seven different jobs in their lifetime. Seven! The likelihood that all those jobs will be in the same geographic region is remote. So having a lot of flexibility in your ability to move is a major asset in my opinion.
One other note: you made reference to your rental property. Note that what ‘myth’ the author of this article is attempting to rebut is the notion of a primary residence being a road to riches. And as Robert Shiller indicated in his book ‘Irrational Exuberence’, that is false. There is a strong distinction between a rental property designed to function as an investment versus a primary residence that offers no income generation and is merely a debt burden.
I myself also own a rental property (outright). It was the condo I stayed in during university which my family purchased since to them, it made more sense to buy a residence for myself (and my brother who was at the same university) than to have us pay rent during that time frame. In that circumstance, there was a logical reason for the purchase and at the time it made financial sense.
But as other posters have stated, you cannot get away from the fundamentals. If it costs half as much to rent a property than it does to buy the property (even at our currently low interest rates) than it is absolutely asinine to want to purchase at these prices.
In the end, as the author is attempting to point out, the housing myth has been something perpetuated by the credit and realtor industries for years and we are now paying the price for their lies and unethical behavior. And it will be a LONG time before this mess winds itself out.