The Guardian Unlimited, April 21, 2008
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Buying a home has always been a central part of the American Dream - but the current economic crisis exposes the folly of this fixation.
Homeownership is a concept to which every politician feels the need to pledge allegiance. It is defined as part of the American Dream. As a result, it is easy to pass programmes that throw thousands of dollars at families for buying homes. Using the same amount of money to pay for healthcare or childcare, or, worst of all, rental housing, would be viewed as prima facie evidence of communism.
The fixation of homeownership could in times past be viewed as sort of quaint. After all, homeownership is often desirable. It can be a mechanism for providing good, secure housing and also for allowing moderate-income families to accumulate wealth. It is therefore reasonable to have policies like a limited mortgage interest deduction or credit that make it easier for low- and middle-income people to become homeowners. But, given the current situation, it is long past time for the blind faith in homeownership to be subjected to serious scrutiny.
The economy is sinking into a recession and faces the worst financial crisis since the depression. The unemployment rate is rising, the foreclosure rate is soaring and home prices are plummeting. It's time to settle some scores with the people who brought us to this sorry state of affairs.
The identity of some of the villains is already widely known. At the top of the list is Alan Greenspan for his malfeasance in allowing the housing bubble to expand to ever more dangerous levels and ignoring the explosion of predatory mortgages. Then we have the mortgage brokers who made the predatory loans and the Wall Street wunderkinds who repackaged them in complex financial instruments and sold them all around the world. We can also include the builders and the realtors who profited from and promoted the irrational exuberance that fed the housing bubble.
In addition to these people, we must also include the ideologues of homeownership on the list. These are the folks who pushed the ideology of homeownership as an end itself. They insist on lavish government subsidies, even in situations where homeownership is not a good solution for the people affected.
Of course only an ideologue would view homeownership as an end in itself. One of the reasons that millions of families face foreclosure and/or the loss of their life savings is that the ideologues of homeownership continued to promote homeownership even when it was clear that buying a home would be financially detrimental.
Recognising the risks of homeownership in a bubble wasn't a matter of rocket science - it was simple arithmetic. The ratio of house sale prices to annual rent soared past 20 to 1 in the bubble markets, approaching 30 to 1 in the most inflated markets.
If a homeowner takes out a 7% mortgage (very low for a subprime buyer), pays 1% of the value in property tax each year, and another 1% for insurance and maintenance, then ownership costs are equal to 9% of the sale price. If the house sells for 20 times its annual rent, then this family is paying 80% more in housing costs as homeowners each year than they would pay as renters. If the house were selling for 25 times the annual rent, then the family would be paying 125% more as homeowners as they would as renters.
For low and moderate income families who are struggling to make ends meet, and pay for necessities like healthcare and childcare, how are we helping them by having them pay 80-125% more than necessary for their housing costs? Oh yeah, but they will accumulate equity in their home.
Right, the housing bubble will keep inflating indefinitely. Maybe the ideologues of homeownership thought that housing prices would just keep rising forever, but this was an unbelievably stupid thing to believe.
The homeownership ideologues really screwed over an awful lot of low- and moderate-income families because they didn't know what they were talking about. If progressives ever advocated policies that were as wrong-headed as pushing homeownership in the middle of a housing bubble, we would be hearing about it for the next 40 years. Real or invented excesses of the 1960s are still a backdrop that right-wingers use in current political debates.
Incredibly, instead of acknowledging their mistake, the homeownership ideologues want the government to throw even more money at homeownership. (The money is more likely to end up with bankers than homeowners, as I have argued elsewhere.)
In the interest of promoting better housing policy in the future it is important to have a public acknowledgement of the follies of homeownership ideology. We don't have a bottomless pit of money to satisfy their perverse ideology. If homeownership does not make economic sense, then we should not tell people to sacrifice healthcare and other essential needs to make the ideologues happy. It's time to force some honesty into the discussion of housing policy - renting sometimes make sense.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.