The Deep Downside of Home Ownership

Mostly by accident, I have never owned a home, and consider it one of the best financial moves I've ever made.

Not because suffering through one of the worst real estate downturns in history would have slammed my finances, although that's likely true. But because in the last four years, my wife and I have lived in four different locations in three different states on each side of the country. Each move was driven by work and school opportunities that would have been out of reach had we been tied down to one home.

Our story is hardly unique. In one of the most telling studies looking at the benefits of home ownership, economists Andrew Oswald and David Blanchflower ask, "does high home-ownership impair the labor market?"

Their answer is "yes."

Looking at regional data since 1980, the pair found that "A doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate." That's simply massive.

The study makes clear that homeowners don't necessarily have higher rates of unemployment. Instead -- and this is really important -- they conclude that high rates of homeownership affect the entire labor market through lower rates of productivity and entrepreneurship.

Regions with higher home ownership created fewer new businesses, had longer commute times, and lower rates of labor mobility. All three impose costs on the labor market, and eventually lead to overall lower rates of employment. Importantly, the results aren't dependent on the years surrounding the housing crash, when millions of Americans became underwater on their mortgage. This is a deeply seeded trend.

The study controls for characteristics like age and education, but the authors caution against reading too deeply. The results are what they are, but correlation doesn't necessarily mean causation. "We are unable, in this paper, to say exactly why, or to give a complete explanation for the patterns that are found, but our study's results are consistent with the unusual idea that the housing market can create dampening externalities upon the labor market and the economy," they write.

But other studies show similar trends.

One 2011 study looking at household debt accumulation -- most which is mortgage debt -- showed that auto sales in regions where debt accumulation was the highest during the boom were down 40% since 2005. In regions where debt accumulation was the lowest, auto sales were up 30%. Same stuff for zip codes that have a high percentage of homes with underwater mortgages. The "American dream" of owning a home can be detrimental to the "American dream" of a strong economy.

Now, owning a home makes sense for a lot of people. But to me, the study has two obvious takeaways. One is that while many of us focus relentlessly on the costs of renting -- you're throwing your money down the toilet! -- the costs of owning a home can be far greater. Worse, those costs are largely hidden, since it's hard to calculate the price of not being able to easily move for a new job.

Two, there are hidden costs to subsidizing home ownership. The highly popular mortgage interest deduction is one of the largest tax deductions in existence. The FHA is now a major player in the mortgage market. Both seek to promote home ownership without much thought about the knock-on costs, like lower job mobility.

In 2004, president Bush addressed the National Association of Home Builders:

For millions of our citizens, the American Dream starts with owning a home. Home ownership gives people a sense of pride and independence and confidence for the future. When you work hard, like you've done, and there are good policies coming out of our nation's capital we're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.

Be careful what you wish for. 


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  • Report this Comment On May 08, 2013, at 2:44 PM, damilkman wrote:

    I have issue with this article because home ownership in my opinion is a life style issue not a financial issue. People purchase homes not for the investment but because they believe it improves their quality of life. It very well may be they may even choose unemployment over walking away from their home.

    If you want a green bedroom, a purple basement, or you want to add or smash out a wall, a fishy bathroom, or even a particular tree to look at from your kitchen window, you can only do that if you own your home.

    If we make every life style decision based on how it maximizes our financial net worth we may be very wealthy but unhappy. My best friends father was an executive on the fast track to corporate. However, he walked away from it because he wanted his children to grow up in one place in a house. He could have had a shot at a senior officer position if he was willing to move every 12-18 months. Is he a failure because he did not put in the time to climb the corporate ladder, or is he a success because his happy children then had 15 grandchildren?

  • Report this Comment On May 08, 2013, at 2:47 PM, TMFMorgan wrote:

    damilkman,

    I agree 100%! I think the big problem is how uncommon that view is.

    After the housing bubble (2010), a Fannie Mae survey showed that 60% of homeowners bought their home because they think it will make a good retirement investment. A separate survey by housing Zillow showed nearly half of prospective homebuyers believe home prices will appreciate by 7% a year going forward.

  • Report this Comment On May 08, 2013, at 3:09 PM, TheDumbMoney wrote:

    Hi Morgan, I agree with you on the externalities, but as to finances I would note:

    The later two citations appear only to look at recent events. Inarguably, bad things happen when homeowners are underwater, both as to mobility and to purchasing power. But I suspect these economic risks of home ownership are non-linear over time, and also largely psychological. Non-linear because they decline the longer one owns a home in typical housing environments, since home prices tend to keep pace with inflation unless the area suffers meltdown (see Detroit). Which does not exactly happen overnight.

    Thus, excluding people who bought during the greatest housing bubble of the last 80 years (and possibly ever) it is actually relatively easy to sell a home if one moves. I see it all the time among friends who bought homes in 1996-2003, and 2009-2011 even. People just list their houses and go. I have a friend who just sold and moved from CT to LA (original home purchase in 2002) (job change), one who moved from LA to SF (original home purchase in 2009) (job change), one who is presently selling a condo in Brooklyn (original home purchase 2003) (sick of New York) (plans to rent until they decide where the heck they want to live), one who sold a condo in Manhattan and bought a house in Westchester (original purchase in the early 1990s) (sick of New York, but wanted to be near it for job reasons), etc.

    I think to the extent a home traps you, it is an artifact in most time periods of human psychology, not of economics (excluding 2004-2008 purchases). Even selling a home at a loss if one has owned it for only a year or two can theoretically net one out ahead versus having paid money in rent.

    Of course, as we know from investing in stocks, psychology is of supreme importance!

    Also, a word on the exernalities. As some examples of what I'm not sure even the longer-term study covers (you only explicitly mentioned it controls for numerical age and education level, and I didn't read the actual study), people who own homes are probably more likely to have kids in school who won't want to leave their friends, be involved in leadership in civic organizations, have lived in a place for longer and have friend-networks there they themselves don't want to leave, have been at their job longer and have social capital there (even if promotion prospects have dwindled), and in short have all sorts of other non-economic reasons why they don't move (even when they should), in addition to their home-ownership, and which negatively impact the broader labor markets over larger time periods. You of course hit on this when you you discuss correlation, but I thought I would hang some specifics on it.

    As to the home mortgage interest deduction, there is no answer. It is a titanic boondoggle, which I know now having bought my first house in 2010 and seeing how much it lowered my taxes, to no discernible broader good other than to the extent lower taxes are better for the economy, which as you know is not as simple to tease out as many imagine.

    Best wishes.

  • Report this Comment On May 08, 2013, at 6:02 PM, hbofbyu wrote:

    Home ownership is a myth.

    If you can be taxed for simply "owning" something, you don't really own it. You are just renting that land and house from your local government. It was there before you and will there when you are gone. You OWN a pair of shoes. You don't own a house.

    In my neighborhood if I keep a house for 10 years I lose $30,000 in property taxes. That usually negates most of the gain I see in appreciation.

    Go read "Predictably Irrational" by Dan Ariely

    Chapter 8: The High Price of Ownership

    It is psychological not financial.

  • Report this Comment On May 08, 2013, at 9:11 PM, TheDumbMoney wrote:

    hbofbyu, good point, though it depends upon where you live as to property taxes. For me, my property taxes are largely paid for by my massive mortgage interest deduction, at least for the next 5-7 years or so before I really start to go down the amortization curve. (In Westchester County, NY, that would not be true.) The mortgage interest deduction is usually connected with subsidizing lenders, but it seems to me equally true that it subsidizes payment of taxes to localities. It just depends on how you allocate where the borrower's "saved" money is going. In California, too, Proposition 13 precludes cities from raising one's property taxes more than a small fixed percentage per year, which is connected to one's original purchase price.

    It is true one does not "own" a house until one has completely paid off one's loan, but it's not really relevant to the discussion as far as I can tell.

    Best,

    TDM

  • Report this Comment On May 09, 2013, at 10:32 AM, hbofbyu wrote:

    Yes, how you allocate money should be taken into consideration and the mortgage interest deduction is a huge incentive; but aside from that advantage isn't an interest payment with nothing going toward principle just money down the drain - similar to rent?

  • Report this Comment On May 09, 2013, at 11:08 AM, miteycasey wrote:

    Why does everything boil down to money?

    Doesn't happiness count for anything?

  • Report this Comment On May 09, 2013, at 11:14 AM, mdk0611 wrote:

    I think this goes a little too far with respect to the negatives of home ownership, perhaps in reaction to the conventional wisdom. If you're going to move 3 times in the next 5 years you'd obviously be nuts to buy a house. However, not everybody needs that kind of mobility. And in some locations, rents have reached a level where the economics clearly favor ownership.

    In other words, don't take conventional wisdom as gospel and do some number crunching

    BTW - GWB was certainly no an outlier. Name me a President in the last 80 years who didn't say virtually the exact same thing.

  • Report this Comment On May 09, 2013, at 11:38 AM, TheDumbMoney wrote:

    hbofbyu,

    Who said anything about nothing going to principle? I would certainly never get an interest-only loan. Even at the start of amortization, about 1/4 of my payment goes straight to principle (with the rest to interest and taxes/insurance).

    Think of the interest portion as equivalent to rent, and the principle payment as a speculative investment in real estate (and in one's locality), rather than in stock. Not quite "savings," but neither is it typically equivalent to the burning of money (2004-2008 excluded).

    Best,

    TDM

  • Report this Comment On May 09, 2013, at 11:58 AM, toastedseeds wrote:

    There are many ways to look at the value of home ownership. The negative of paying property taxes seems like the least of the issues. While you may not appreciate the services you are buying with those taxes you are getting something of value, which has to be figured into your cost analysis.

    My guess is the rise in unemployment in areas of high home ownership is due to people not wanting to or not being able to move for a new job.

    ts

  • Report this Comment On May 09, 2013, at 12:01 PM, Darwood11 wrote:

    The current cynicism is the flip side of the real estate bubble.

    My cost over 13 years, to own my condo has been about $18,246 per year. That includes purchase price, annual fees, real estate taxes, and unusual expenses.

    The cost to rent over that period would have been at least $14,400 per year. But I would have had less physical space and little say in my abode. Currently, annual rents are about $17,232 and so I'm actually understating the price to rent.

    The difference in real dollars between cost to own with current price, which is sale after paying 6% Realtor fee is about $50,000 minimum to me. That's about 10 years of contributions to a Roth IRA.

    If you want the freedom to move each year, then by all mean "rent." But there is a deep downside to that also.

  • Report this Comment On May 09, 2013, at 12:55 PM, TheDumbMoney wrote:

    toasted, that is another good point. I'm paying property taxes, but I also send my kid to public school for free and get lots of other city benefits.

  • Report this Comment On May 09, 2013, at 2:49 PM, damilkman wrote:

    Another advantage of owning a home is to use for financial games. It has already been pointed out that you can take advantage of significant deductions for interest and property taxes. If an individual owns their home or mostly owns their home pulling money out in the current climate may be advantageous. You are borrowing money at 2.5% - 3% and then slicing a chunk of that off because of the tax breaks. If you think you can do better then 2% in the market, you could make some nice money.

    Also recall why renting is cheaper. Talk to any owner of property and they will tell you they never upgrade the property unless they have to. You fix what you have to and you make sure the property has fresh paint and is clean. When you are renting you are ultimately doing without.

    In the end I do agree with the author that if investment is your motivation buying a home to live in does not make sense. A new homeowner will not be able to leverage for more investment cash except in dangerous bubbles and our internal weakness will mean we will want to spend money on our nest. If one could treat their house as a rental property to themselves it might make sense. But that is really hard, especially if you are married :)

  • Report this Comment On May 09, 2013, at 3:05 PM, daveandrae wrote:

    I live in the midwest.

    My next door neighbor is renting his house. Each of us have access to the community pool, tennis court, basketball court, playground and an elementary school within bicycle distance that has two football fields, four baseball diamonds, four outdoor basketball courts, two separate playgrounds, a library/computer center, and scored in the 98 percentile of the state academically.

    His rent - $1,682.00 out the door each month. No tax deductions. No forced savings.

    My mortgage payment - $1,040 per month, 50% of which goes directly towards principal. The rest, of course, is a tax deduction.

    Thus, these "deep downside" discussions are basically a joke. For you are deluding yourself if you believe, once you have children, you can educate them cheaper by renting vs. buying a decent home in a decent neighborhood.

  • Report this Comment On May 09, 2013, at 3:47 PM, sigmandfreud wrote:

    I concur with the results of the study. Most people push themselves to buy more house than they can afford and thats where the issue lies. However, in my opinion there is a middle ground for enjoying home ownership and financial planning. In my opinion, it would be wise to buy 2 rentable properties or multifamily if you can rather a huge single family home if it is not an emotional or lifestyle issue for you. That way you enjoy homeownership and have flexibility to move and rent those out. It also gives you exponential tax deductions (interest on both mortgages, expenses for rental, depreciation on rental, etc.) all while you are building equity and housing turnaround would be an icing on the cake!

  • Report this Comment On May 09, 2013, at 11:42 PM, jlclayton wrote:

    "A doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate."

    This statement is so general and there are so many other things that affect the unemployment rate that I don't really see a correlation. To me it stands to reason that during an economic boom when unemployment is low, more people would qualify for home loans and home ownership would rise. But as always happens with any economy, a downturn will happen, and unemployment would rise, causing home ownership to fall as people are forced to sell or lose their homes. The economy gains steam again, and the cycle continues.

    Where is the correlation that home ownership is in any way causing the labor market to contract? Maybe I'm not comprehending everything correctly, but. if anything, I see the labor market as the cause for the home ownership rate fluctuations.

  • Report this Comment On May 10, 2013, at 6:38 AM, BigHogArcher wrote:

    Articles like this always amaze me. The problem with America is so few people think or plan for the future, I'm turning 50 this year and If I followed Morgan House's advice I would be renting for $2k/mo instead of my current $800/mo. This allows me to pay for kids college expenses out of pocket and retired at 60 with $300/mo taxes only pmt instead of the $2.5k/mo rent. More planning like this article and government better start expanding section 8 housing now...

  • Report this Comment On May 10, 2013, at 3:27 PM, WPON1963 wrote:

    As a young man, I rented apartments, since education and various job opportunities resulted in moving every 2-3 years on average. When I got married in my early 30s and had children, we upgraded to rented homes, lived frugally and saved. Upon establishing a more static lifestyle in my 40s, purchased my first home well within our budget. Now in my late 50s, have no debt and own my home free and clean. Financial planning should be tailored to one's lifestyle. There is no cookie cutter correct answer for everyone. Being economically conservative, the strategy was: save, invest and buy "used" tangible assets at discounted price. Up to this point in time, this strategy has worked out aok for us and our marriage has never been stressed over debt or bills to pay. Is not peace of mind of some value?

  • Report this Comment On May 10, 2013, at 5:14 PM, stan8331 wrote:

    I think the real problem is most folks commit too large a percentage of their income to a home purchase. There are many excellent reasons to own a home, but investment is near the bottom of the list. If you can't afford to simultaneously, fully fund your house payment, retirement and non-retirement financial investments, plus an additional house payment for several months if you need to relocate and sell your old house, you've spent too much.

  • Report this Comment On May 10, 2013, at 11:16 PM, KBOKSOFT wrote:

    Couldn't you say the same sorts of things about having children?

    * Society generally considers it a "good" thing, even ignoring booming population growth and straining resources. The "American Dream" consists not only of a home, but a couple of kids playing in the back yard.

    * The government gives significant tax incentives for having children. People complain about how much Big Bird costs the American Taxpayer; how about the neighbor with the three kids?

    * It costs an enormous amount of money to raise a kid. Consider how much of America's consumer debt is generated by raising children.

    * In an era of rapidly increasing worker productivity, more people (grown-up children) increase unemployment. A child born today is less likely to be needed in the workforce than one born fifty years ago (unless the little one turns out to be a computer programmer or NBA player).

    * Children (even just giving birth to them) is a burden to the health care system.

    * Having children takes away choices just as does home ownership, if not more so. You can't move to a poor school district; you can't move while Billy is in the middle of his senior year; you can't leave California if you want in-state tuition rates; you can't work late because of soccer practice; you can't work at all because you just had a baby; you can't work somewhere with lousy health insurance; you can't quit your job because then how will you pay for day care or private school or yet-another pair of shoes?

    ...oh and I almost forgot: you can't get divorced.

    Disclaimer: I am married without children. I own my home. I own some of the stocks not mentioned in this posting.

  • Report this Comment On May 11, 2013, at 6:28 PM, revrobdiesel wrote:

    Thanks to the one person who correctly used "principal" regarding the mortgage. :)

    I didn't see anyone mention opportunity costs either. When you buy a place, it usually costs more to come up with a down payment, taxes, utilities, broken water heaters, lawn maintenance, new roof, insurance and other things.

    An apartment, or condo or even a rental house has a fixed cost, sometimes partial utilities (free heat/water/A/C/trash/whatever), possibly no lawn-care for a condo, and no HOA fees and you only pay renters insurance instead of home owner's.

    The money you spend renting could be considered wasted, but you DO get a place to live with typically lower annual costs.

    The money you DON'T tie up in down payments and other things can be invested in stocks or funds and yield a return.

  • Report this Comment On May 11, 2013, at 6:49 PM, badnicolez wrote:

    It amazes me how many people in this type of forum claim to "own" a home with a mortgage.

    If you have a mortgage, you don't "own" a home; you're essentially leasing it from the bank until it's paid off. Until then, the bank owns the home. If you miss a payment, even the very last one, you don't get to stay.

  • Report this Comment On May 12, 2013, at 1:17 AM, FoolishJayhawk wrote:

    Owning a home is not simply a financial decision. Home ownership fosters stronger communities in which people invest their time and energy getting to know their neighbors, build local relationships, and care for their surroundings. There's an incentive to keep the place tidy, an incentive to get involved in the immediate surroundings and local events, and general community-building. From personal experience, one tends to make stronger personal relationships. To many, that may be worth more than the marginal return you get from chasing a fleeting economic opportunity in order to increase your productivity.

  • Report this Comment On May 12, 2013, at 10:07 AM, mrfort23 wrote:

    Home ownership does all those things. It does foster stronger communities, and it is an important part of our society and part of the American dream, and it does help create personal wealth.

    The point of this article, I think, is that in terms of finding employment, it's a hindrance. This isn't saying that 100% of people who own a home would be unwilling to sell it and move for a new job, but that people will be less likely to do so.

    This is especially true in the most recent recession. Unemployment was very high, but because so many people were underwater on mortgages, selling and moving was not necessarily an option. They were tied to their local communities regardless of what employment options were available there.

  • Report this Comment On May 12, 2013, at 10:57 PM, damilkman wrote:

    Perhaps if employers were more agreeable to telecommuters, it would not matter where you lived. But that is another question.

  • Report this Comment On May 13, 2013, at 12:21 PM, Darwood11 wrote:

    @badnicolez

    Good point. As we all know thanks to the housing bubble, if you purchase a home with 0% down, you certainly don't own it. You are a serf on the land owned by the bank. You maintain it, pay taxes and send a tithe.

    Ownership of 5%, etc. makes one a lesser serf.

    For a short time, this was viewed as another "get rich quick" scheme. Buy a house for nothing and with no skin in the game and flip it in a few years. Better than welfare for a short time and until the bubble burst.

    Disclaimer: I do "own" my home (a condo) 100%. Owned it on day 1. The spouse and I decided we'd rather own something smaller outright and invest the remainder in quality stocks and bonds and cash. In other words, we decided to "live below our means" and pay ourselves.

    Not a popular approach during the decade of the new millenium, was it?

    Now, the mantra is "home ownership sucks."

  • Report this Comment On May 13, 2013, at 12:27 PM, TMFMorgan wrote:

    You show me where the article says "home ownership sucks" and I'll show you where it says "owning a home makes sense for a lot of people."

  • Report this Comment On May 13, 2013, at 2:36 PM, Melaschasm wrote:

    The statement "correlation does not mean causation" is really important in this study. One of the big obvious causes of correlation is the likelihood of entrepreneurs to avoid home ownership until their business is stabilized.

    When people are planning to start a business or are inthe early stages of launching a business, taking on the added risk of a mortgage payment is going to seem like a bad idea. At the beginning of a new business big swings in cash flow are expected, and those swings make mortgages very risky.

  • Report this Comment On May 13, 2013, at 5:12 PM, kyleleeh wrote:

    To me the biggest advantage of renting (something small) as apposed to buying a house is that it frees up money to invest in the early part of your life that will grow into a cash flow machine by the time you retire.

    I've seen several people on this thread comment that they would paying 2.5k rent in retirement if they had not bought their home (why would you be renting a multi bedroom house after the kids move out?) But they miss the point that if they had built up a large portfolio of cash generating assets it would not be a problem to pay the rent.

    I know several seniors who are struggling to pay for utilities, food and medical costs even though they own their home outright, because they have little to no cash flow. Conversely I have never once in my life heard of someone with a lot of cash flow having trouble paying the rent.

  • Report this Comment On May 14, 2013, at 11:29 AM, LegalizeMe wrote:

    The problem occurred when homes went from being a place you live to a piggy bank. I live in my home, that's it. It's not a piggy bank and it's not retirement savings.

  • Report this Comment On May 31, 2013, at 2:49 PM, badnicolez wrote:

    @Darwood11: We did the same thing after the housing crash.

    We moved to Summerlin in Las Vegas and paid cash for a great little two-bedroom condo that was only six years old. The sellers brought $80k+ to the table at closing just to save their credit. Ouch.

    We also paid cash for a sweet condo on the beach in Puerto Penasco, Mexico, which is an easy 8-hour drive from here. We rent that out when we're not there and it pays for itself. We'll likely sell the place in Vegas someday and retire in Mexico.

    It beats the heck out of having to pay the bank tons of interest and the bills associated with a McMansion.

  • Report this Comment On February 12, 2014, at 10:25 AM, fadecomic wrote:

    I realize this is an old article, but I cannot help but be confused by the comments. I chose my neighborhood for the schools. The rent here is comparable to a mortgage payment with escrowed taxes, and it's rising all the time. Therefore, I don't see where this "extra cash for investing in my early years" is coming from. Are we talking about the ~5% downpayment? Given the amount of time it took me to save that, and how much it would've made in this relatively slow market, I still see advantage in the down payment option.

  • Report this Comment On February 13, 2014, at 11:18 AM, miteycasey wrote:

    If you compare an apartment rent, or a 2br house, to buying a McMansion you would have money to invest.

    I can get a 2br apartment with 1000sq/ft for ~$900 a month. My McMansion will cost me ~$2000 in mortage with 20% down. This includes insurance and taxes.

    I'm trying to talk my wife into the apartment for 1 year. We could easily save $15K in out goes when comparing the apartment to house (electric bills,gas, water.)

    The down side is...

    1) My kids would need to share a small bed room

    2) 2 moves with storage buildings.

    3) no back yard/ room to play for my kids

    and other things I'm sure I'm missing.

    It's a tough decision.

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