Time Cover: Rethinking Home Ownership

Time magazine recently had an interesting article, The Case Against Home Ownership which explained why the American dream wasn’t all it was cranked up to be. Mainly, because it just doesn’t make economic sense. It prevented people from being able to migrate to where jobs where, resulted in a 49% higher consumption of energy amongst detached-home owners, and cost the government hundreds of billions in lost tax revenue every year. And the often quoted inverse correlation between teenage pregnancy and home ownership is sketchy and inconclusive (apparently the correlation between car ownership is higher than home ownership!).

The article heavily criticizes the role of the government in its efforts to  keep housing affordable by offering tax incentives and artificially lowering the interest rates on mortgages. The result of these policies is that people over-extend themselves in an effort to get a bigger tax break and the average homeowner saves less than $600 a year on their taxes. The major benefit goes to families making over $250,000 a year and who probably wouldn’t have any problems being able to afford a home anyway. The UK removed the tax deductions on homeownership a decade ago and actually has a higher rate of homeownership than the US (which has hovered around 65% over the past two decades).

Interestingly enough, Switzerland, which is one of the wealthiest nations, has a  low ~35% level of homeownership.

I just had a discussion with a young couple that bought a condo during the peak. They felt somewhat trapped as the husband was unable to move to better opportunities elsewhere because they were underwater on their mortgage. He hadn’t considered doing a short sale on the property, mainly since they both had jobs and didn’t really need to, but they were renting out their spare bedroom to help pay their mortgage (they had obviously over-extended themselves).

As I’ve repeated many times before, your own house is not an investment, it’s where you live. You buy a decent place in a decent neighborhood that you can easily afford. You do not buy a house because you need the tax break or because the bank will lend you more money than you can afford (of course, those days are behind us).  We’re still a couple of years away from a bottom in the real estate market. Until then, renting isn’t a bad option.