The argument against home ownership

[flashl]

What was a savings plan is now pushing some into indentured servitude

Americans may disagree about nearly everything, but few contest the idea that owning your home is a good thing. Paeans to homeownership are a commonplace for American politicians, and, since the nineteen-thirties, public policy has been designed to make home buying cheaper and easier. Homeownership, the argument goes, has tremendous social benefits, stabilizing neighborhoods and making people more willing to invest in their communities. And it has economic benefits, too, serving as a forced-savings program that allows people to leverage their incomes and build wealth. Homeownership “provides financial security for families,” Mel Martinez, the former H.U.D. Secretary, has said, and it “generates economic strength that fuels the entire nation.”


That never seemed more true than in the years from 1994 to 2005, when the percentage of Americans who own homes rose by almost ten per cent, and the amount of wealth tied up in property soared. But our veneration of homeowning has blinded us to the fact that, along with the benefits, it has some very real costs — costs that only get bigger as the ranks of homeowners swell. The housing boom undoubtedly helped the economy’s growth rate and made lots of first-time home buyers happy. Unfortunately, it may also end up prolonging and deepening the current downturn.


In part, this is due to the nature of the boom, which was stoked by cheap credit and lax lending standards. Buying a home used to require a sizable down payment: in 1976, the average for a first-time buyer was eighteen per cent. By contrast, a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent. If you earn eighty thousand a year, no one will lend you four hundred thousand dollars to buy stocks, but plenty of people were willing to lend you that money to buy a house. As long as home prices were rising, all this leverage seemed like a good thing: it let people buy homes that they couldn’t otherwise afford, and maximized their return on investment. But, with home prices sinking — in the final quarter of 2007, they were down almost 9 percent from the year before—the downside has become clear: as many as fifteen million homeowners now owe more on their mortgages than their homes are worth. Homeownership isn’t building wealth for these people; it’s locking them into indentured servitude.

The New Yorker

[DesertFlower]

1. interesting article.

thanks for posting it.

wow. 2% down on a $400,000 house.

we bought our first house in 1989. it was $165,000. the required down payment was 10%. we put 20%. didn't want to pay $100 in PMI. the interest rate was 9-3/8. about 2 years later we refinanced at 8%. then 6%.

even though our income would have allowed us to borrow much more money, i felt uncomfortable mortgaging more than $140,000.

we mortgaged $120,000 on our present home. in 5 years, with paying $300 month extra towards the principal it's down to $82,000. at one point it was valued at $750,000. now it's down to $550,000 and could go lower. i always felt the value was inflated.

[wtmusic]

2. Just like clockwork

articles like this appear at every downturn in real estate, then slip down the memory hole when prices rise. Those who worry what their house is worth every year should just stuff their money in a mattress.

The "indentured servants" are a special breed of homeowner -- those who buy too late and too high, and buy for status.

[flashl]

3. What is the answer when sometimes renting is more costly than a mortgage payment? nt

[wtmusic]

4. Good question.

But with prices coming down you're going to see a lot lower mortgage payments in the next year or so. The finance industry is hurting, the real estate industry is hurting, deals are being cut. If you have any money saved up it might be time to see what's out there.

I've bought two houses in my life and dabbled a little in apartment building trusts. The time you DON'T want to buy is when real estate is showing double-digit percentage annual returns. If you do a little research about comparative values you can be very successful buying when there's "blood in the streets".

IMHO.

[Warpy]

5. Look at what rents are doing

If they're rising, then it makes much more sense to buy a modest property. Even if you lose your down payment in the crunch and get into an upside down mortgage position, you're still way ahead of the game when you add what you would have been paying in rent to the tax break you'll get on mortgage interest. Just make sure you're factoring everything into that payment: interest, principal, taxes, and insurance before you buy.

Plus, you can find out for yourself why black ceilings are a bad idea.

I bought here because rents were jumping up and housing prices were still relatively low. It took only two years for my mortgage payment to be significantly less then rent. I wasn't really fussy about the house, though. It's no mansion.

[truedelphi]

7. A friend's landlord was just explaining that he

Would do do the friend and his wife a favor and rent his house to them for a little more than the mortgage payment.

He also said other landlords in the neighborhood are raising their rents by 20% - so many foreclosed homeowners these days that rents can go as high as you want to make 'em.

[bhikkhu]

6. If you sold high, then went into a decent rental

you would be ahead now, big time, in most markets. On the other hand, if you bought low you are still ahead, while the rental market is catching up with real home prices in most markets....its a tough call and a roll of the dice either way.

"Don't base big financial decisions on anonymous web posts" is good advice. In any case, at this point most people are constrained by their prior decisions, and real estate vs rental is not such an easy question to answer at the moment. I bought low myself. While I could have saved money at any point by renting, I prefer the good monthly gain in equity (exceeding any likely devaluation) that my 15 yr gives me.

I expect at some point inflation will blow all of these fine arguments out of the water and still leave me in decent shape, but that is another topic.

[Kolesar]

8. People who don't know how to balance a checkbook or use a paintbrush should not buy houses

Home buying for everybody is a conservative fantasy. Some people just don't have the intellect or self direction to keep up with a house. They should rent. Or move back in with Mom

[Captain Angry]

9. Home buying didn't used to be a fantasy.

It used to be something considered very carefully. And after 30 years, the owners, and I do mean owners, burned the the mortgage the bank held. All they ever had were property taxes from then on. It was their castle.

The refinancing craze destroyed that. Who would keep a house when you could refi and flip? The benefits of actually owning the property and being able to have a home to give to your children someday has nearly become a distant memory.