Does America need a new dream?

A recent debate featured in The Economist posed the question: Should homeownership be discouraged?

Homeownership proponents argued the vested interest homeowners have in their neighborhoods produces many social benefits. These benefits include:

family stability;
civic participation;
quality education;
reduced government transfers in old age; and
low crime rates.

Supporters maintained homeownership has no negative effects on the economy. The economy has suffered extreme highs and lows over the past 50 years, while the homeownership rate during the same period has remained relatively static.

Additionally, they note that if homeownership has any effect on the economy, it is positive. Homeowners possess greater control over their investments — their homes. In contrast, those who invest in the stock market rely upon third parties to create profit.

Homeownership opponents argued homeownership adversely affects the economy. Negative effects include limits on:

geographic mobility to pursue better employment;
entrepreneurial pursuits, as home equity ties up wealth; and
risk mitigation, as the financial risk of losing a home is too great for most families.

Homeownership opponents claimed the social benefits of homeownership are not unique to homeownership. The same stability can be accomplished by granting more rights to renters. For example, incentives for civic participation would directly encourage everyone to have an interest in the community.

Some participants argued the government should take no official stance on homeownership at all. To them, the impact of homeownership was insignificant.

first tuesday insight

In encouraging homeownership, the U.S. government has not always had pure intentions. Its motives have been corrupted by massive builder and lender influence. As a result, it has sometimes inadvertently attacked the desirability of homeownership while attempting to encourage it.

One of the greatest government-sponsored incentives for homeownership is the mortgage interest tax deduction (MID). Yet, who benefits the most from the MID, after all? The administration’s effort to give homeowners a boost in purchasing power has instead inflated home prices. This forces buyers to borrow more — stuffing lenders’ pockets with interest and sellers with profits while failing to make homeownership any more attainable for buyers.

A buyer’s 31% debt-to-income ratio (DTI) still controls a home’s purchase price. But the buyer’s DTI is set by the amount of purchase-assist financing the borrower obtains, which includes the monthly cost of interest payments. The seller (owner or builder) benefits from all of this.

Related article:
The MID truth test

Instead of concentrating on one form of housing over another, the government ought to be concerned with policing the overall stability of the housing market. The key to fostering stability is not to make all people homeowners. To do so artificially deprives apartment owners of their normal flow of tenants. Government must make the benefits associated with homeownership available to tenants and homeowners alike.