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Home Publications Blogs Beat the Press Many Experts Who Say Housing is the Best Way to Build Wealth Also Said That During the Housing Bubble

Many Experts Who Say Housing is the Best Way to Build Wealth Also Said That During the Housing Bubble

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Wednesday, 27 February 2013 06:06

The Post had a useful article on the growing wealth gap between whites and African Americans. It notes various factors such as higher unemployment rates and smaller inheritances that prevent African Americans from accumulating wealth. However the piece concludes by saying:

"Many experts say housing is still the best way for Americans of all races to build wealth. But it is critical for families to have low-cost financing so they can have predictable housing costs going forward and build wealth over time.

'If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,' said Reid Cramer, director of the Asset Building Program at the New America Foundation."

It would have been worth pointing out that almost all of these experts also pushed homeownership as a wealth building strategy at the peak of the bubble. Those who followed the advice of these experts were virtually certain to see large losses in home values that would wipe out much or all of their wealth.

Even when housing is not in a bubble, for many individuals who are not in a stable job or family situation, homeownership is likely to be a very bad way to build wealth. There are large transactions costs associated with homeownership, typically around 10 percent of the purchase price. (That's combining buy and sell side costs.)

If a person cannot expect to stay in a home for at least five years, they are unlikely to cover these costs. In such situations they would be better off renting and trying to save the extra money they would have paid on a mortgage and other ownership costs.

Comments (9)Add Comment
Thank you!
written by watermelonpunch, February 27, 2013 7:58
I often wonder how disconnected from ordinary people someone has to be to think that home ownership can build wealth for people who are not even making a living wage, period.

From what I've seen & read, property ownership more often builds the wealth of the already wealthy in our economy.
Housing Markets
written by bakho, February 27, 2013 8:18
Housing markets are not equal. In many parts of the Midwest, housing prices don't rise faster than inflation. There is no squeeze on building new housing.

In places like Flint and Detroit, there are fewer residents today than 20 years ago so housing prices are in the tank. There is a glut of housing that would be cheaper to tear down than maintain. Buying homes in dying neighborhoods is about as likely to promote wealth as buying a house in the 60s in a "white flight" area. Banks will make money by scamming consumers if they can. This is why lending regulations are so important and why there is need for more consumer protection from the bankers.
excellent point
written by Peter K., February 27, 2013 10:14
Clinton pushed this and Bush took up the baton. Didn't turn out well.

Why not pay people enough so they can afford the necessities of life? To focus on that is divisive and not in tune with Clinton's Third Way.
Link from VoxEU
written by Sam H, February 27, 2013 10:24
I thought this was an interesting article (http://www.voxeu.org/article/w...xplanation). I wonder if the private/individual cost-benefit analysis is different than social/public cost-benefit, or if saying "'If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,'" is actually a much more complex argument than the financial cost-benefit... maybe investing in buying a home aids wealth creation for families with children because they end up investing more in education, or have greater home stability, or are more likely to find and hold a job?
Buying/Renting
written by Pauley, February 27, 2013 10:49
I think of buying a house via a mortgage as still renting - renting the money with which to buy it. Adding the interest paid over the full life of our loan to the purchase price, we were always behind in net outlay at the long term [low] rate of appreciation. It was only briefly at the height of the last [insanely inflated] bubble that we were slightly net positive. Had we sold to cash out and rent another house outright, the increase of rental rates post-crash here would have stripped our net "profit" in four years and we'd be renting a house now for more than our mortgage. I never thought of our house as an investment greater than a simple savings account. Factor in wear/repair/hazard insurance and it's just a non-FDIC-insured place to park ourselves and some of our savings. It can't and shouldn't be anyone's sole source of savings.
"Buying/Renting, or Landlord/Loanlord?"
written by Pauley, February 27, 2013 11:19
... perhaps a subtitle to add?
this is intergenerational issue
written by pete, February 27, 2013 11:42
Clearly anyone who had purchased a house in the 70s made money by 2006. Advnatage of buying a home with a mortgage is that it allows the investor to leverage that money. I.e., say you have $150,000 in savings. You could buy a house with cash, or continue to rent, or take out a mortgage and buy a house. In the latter two cases you get the stock market return on the $150,000. However, additionally, in the mortgage case, you get the return on the house, which can also be interpreted as hedging your future rents. Since you mortgage the house, there is no wealth created...you do not own the home. However, by hedging future rent increases, this frees up the $150K somewhat.

Houses can be left to children, whereas rentals cannot. Same with social security. Since a lot of poor have a lower life expectancy, they should be allowed to cash out their social security (at the average life expectancy value, not theirs) and put it in an IRA.
...
written by liberal, February 27, 2013 1:44
bakho wrote,
Housing markets are not equal. In many parts of the Midwest, housing prices don't rise faster than inflation. There is no squeeze on building new housing.


Well, really, people never make money on homes per se. They make money off the land under the homes.

Land tends to appreciate; homes are capital which depreciate.
...
written by watermelonpunch, February 28, 2013 12:23
@ Pauley
"Buying/Renting, or Landlord/Loanlord?"


Exactly what I was thinking. This topic reminds me of Louis Hyman's book "Debtor Nation". (a bit dry, but a good easy read)

One way or another, the underclass is still the underclass. Debt availability just dresses up low wages, like lipstick on a pig.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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