Tom MacWright

tom@macwright.com

Homeownership

Most people I know fit into one of two camps: they either want to buy a house and they can’t, or they’ve bought a house. The desire to own ones own home is almost universal in the people I know in the US. It’s even stronger for folks who live outside of major cities. And people for whom the “security” part of homeownership rings stronger - who grew up in instability or in countries where physical goods are preferred to financial instruments for savings.

I don’t want to buy a house. Maybe I’ll need to, but I can’t help but think that the milestone is vastly overrated in public imagination and there are problems with it on a personal and societal level.

Economics

Houses are non-diversified, illiquid holdings that make up too large a percentage of people’s total invested assets.

Your neighborhood, your city, even your state could hit a snag that causes home values to decrease. I’ve lived in neighborhoods that seemed like they were on the upswing, only to see them stagnate (in terms of value) for years. You wouldn’t put 80% of your investments into a company with one office in one town, but people make the same concentration decision with housing.

The risk of housing is obscured by its illiquidity. You only know what your house is worth when you sell it, and you only do that rarely. So even though that price might be shifting rapidly, it makes less of a mental impact than seeing a chart of some stock or bond fluctuating in value.

Homeowners over-invest in their own homes. Your buyer’s agent is paid a percentage of the home price, so they are incentivized to recommend bigger and more expensive houses. The illiquidity of housing means that you can’t easily upsize to a house with another bedroom, so you’re pushed to buy a bigger house than you need right now and to “grow into it.” People with more expensive homes then go on to invest less in other assets.

Homes are illiquid: you can’t easily and cheaply buy and sell them. The transaction costs are enormous: realtor fees at 5-6% of the home value are just the starting point. The real estate industry’s blatant collusion is finally the subject of a lawsuit, but there’s no knowing when, or if, the industry’s fees will decrease.

In comparison, there are plenty of liquid things you can buy. Even with the dust-up around payment for order flow, stocks are cheaper to buy and sell than they’ve ever been. A recent analysis showed that the hidden price of “free” trading is 0.07% at TD Ameritrade, 0.23% at Fidelity, 0.31% at Robinhood, and so on. Low numbers. And instant: you can buy or sell most of these things any time between 9:30am and 4pm on most days.

Stocks aren’t perfect, and neither are other financial instruments, but no other thing you buy is nearly as inefficient and haphazard to buy and sell as a house.

Homes also have countless phantom costs that aren’t included in most people’s calculations: everything from taxes, to replacing a roof, to the time it takes to do house upkeep. As they saying goes, rent is the most you’ll pay, whereas a mortgage is the baseline.

When I bring up these issues to my tired friends who just want me to stop talking and relax, they often say that, well - they don’t think of housing as investment. They wish it wasn’t treated as investment. Unfortunately, housing is more of a financialized good than anything else, and there’s no way to interact with it differently. It’s hard and rare to buy a house with the mechanics of a broker. Most people are going to use a mortgage - which is a highly leveraged asset tied in with government and private industry backing. As I like to say, the 30 year mortgage is an intrinsically toxic product.

Homeownership is not a social good

A lot of logic around homeownership centers around the idea that homeowners are invested in their communities. Homeownership is, in the words of a million realtors, an investment in your community. We assume that homeowners are going to be better “eyes on the street” for when things to wrong, and for them to take the initiative to improve their blocks.

It’s hard to quantify these good feelings and positive vibes. It is possible to quantify other things.

Buying a house makes even liberal homeowners as opposed to local development as conservative ones.

Political turnout for issues between renters and homeowners

The gap can be pretty big: one study showed that 75% of renters supported new housing being built in their area, while only 51% of homeowners did.

The availability of homes and mortgages has a long history of overt racism at every level. But it’s remarkable that even in an article about how this system has failed so many Americans, we still have to say that homeownership is “an undeniable part of the American dream.” I’m a big fan of that Stafford Beer quote: the purpose of a system is what it does. The purpose of the real estate industry, until recently, or until now, or now, has been to further segregation. Let’s not judge it based on what it has failed to do.

The refrain that homeownership is investment in community, or participation in the American dream, is so ingrained in culture, that so too is its inverse: that renters aren’t. It is suspiciously convenient that richer people so happen to also be morally superior. And it’s especially troubling that in major cities where homeownership rates are low – 33% in New York City, 38% in San Francisco – public office is invariably held by homeowners.

The current homeownership norms are shaped by racist post-WWII government subsidies and explicit anti-leftism

America’s current homeownership rates are part of a post-WWII push. In 1900, 46.5% owned homes - now it’s around 66%. This is due in part to suburban sprawl, but also due to the GI Bill, which subsidized the mortgages for 20% of all new homes after the war, for soldiers, particularly for white soldiers.

The push to own homes seems even stronger amongst my more leftist friends, understandably because of the rapaciousness of landlords and the allure of “exiting” from part of capitalism. But the boosterism around homeownership that created our current environment was explicitly and loudly capitalist and anti-radical:

From a Washington Post column in 1919 (from the linked article):

Widespread and successful home owning activities in the United States this spring would do more to alleviate social unrest and build a bulwark against the encroachments of bolshevism than any other single development.

From an organization of realtors:

Socialism and communism do not take root in the ranks of those who have their feet firmly embedded in the soil of America through homeownership.

Who else is saying this?

Ramit Sethi is a standout for talking about how to have financial security without focusing on homeownership. Georgism, and The Henry George Program, and its very entertaining host, are also not afraid to call out some of the contradictions of homeownership bias.

What do you do instead?

I rent. For me, it’s much cheaper to rent than to buy in New York, and in many other places. I invest the difference in boring diversified investments, Bogleheads style.

But what about in general? Well, we could start by correcting some of the parts of society that we’ve tilted toward homeownership. It would make homeownership less of a “sweet deal” for some, but would also reduce the volatility and risk in buying a home if it’s less of a sophisticated investment.

That means chipping away at the mortgage income deduction, which has always been a regressive subsidy to the rich. It seems politically impossible, but crazier things have happened, and countries like Germany don’t have any such laws.

Public ownership, if it was architected the right way, could reinvent some of the benefits of ownership in ways that benefit more people also also eliminate some of the worst risks. What if paying for you own housing invested you in a diversified set of houses instead of just one? And there is so much to learn from housing in Vienna. Key quote from that article:

Vienna invites us to envision a world in which homeownership isn’t the only way to secure a certain future — and what our lives might look like as a result.

Also, embracing land value taxes could help reduce the speculative aspect of the real estate industry.

To replace the “wealth-building” aspect of homeownership, we already have some solutions, like the growth of retirement plans and automatic investing. We could, and should, have a renewed social safety net, too. These diversified alternatives would be much less risky than gambling it all on a specific piece of land.

Why are leftists so into homeownership?

But what we need is a politics that cares more about renters, and a culture that is less painfully normative about homeownership. Especially for those on the left, I want people to rethink the uncritical acceptance of homeownership as a goal.

Why are leftists so uncritical of the financialization of homes? They’re allergic to investing in banks and equities, but happy to co-invest with a big bank in order to leverage a home purchase, which will in turn create a mortgage product that can be resold on the other side?

Why doesn’t class analysis lead them to prioritize the needs of poor renters over rich homeowners, to chip away at the laws, like Prop 13 and the Mortgage Income Deduction, that explicitly subsidize homeowners? In fact, why are renters in cities - people always renting “luxury condos” - viewed as a rich outsiders, when the statistics don’t back that up?

Why isn’t it worrying that homeownership has been proudly talked up as a strategy to entrench conservatism and fight communism. And isn’t it worrying that it seems to do just that - to increase voter turnout and shift voting behavior in a conservative direction?

Renting should be better

I think that a lot of well-meaning people view the struggle of renters as a struggle to become homeowners. So they focus on turning renters into mortgage-holders. They want to subsidize demand and subsidize the “first home purchase.”

Renting itself should be better. Renters should have more stability, more rights, and more options. Renting forever should be a reasonable option for most people, as it is in some countries.

Caveats:

  • I know that homeownership is a good vibe and you can paint the walls and stuff.
  • I know that there are plenty of anecdotes about great success. There are also anecdotes about picking lucky stocks, but that nobody considers that a sage retirement strategy.
  • Homes are “hard goods” in a sense that feels better than stocks, and is less icky and feels less financialized. I understand those vibes. They are, though, just as intertwined with big banks and real estate developers and government backing and the violence of the protection of private property as any stock.
  • Yes, mortgages are an effective form of forced savings. But so is Social Security, and we should bring the same behavioral-economics innovation to other, better kinds of investments.
  • The vacancy argument is debunked.
  • No, hedge funds and private equity did not ruin the housing market.