Home prices can only go up. Bankers know what they're doing. Regulation is a nuisance. Leverage creates wealth. People used to believe this stuff.
These examples offer valuable lessons: There are widely held, seemingly obvious truths that are not only false, but horrifyingly dangerous. Here are three others many still cling to.
1. Homeownership is superior to everything else
Last winter, U.S. Rep. Barney Frank analogized that not having a foreclosure moratorium before implementing a mortgage modification plan would be like being killed in combat before hearing news of a cease-fire. The Wall Street Journal gave a brilliant retort, writing, "Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office."
If you listen to most politicians, you might think there are only two places to live: in a house you own, or in a box under a bridge. As a happy renter, I find this hilarious.
The fact is, many people shouldn't own a home. They belong in the rental crowd. There's nothing morally or sociologically wrong with this. Ensuring that everyone has a roof -- not a mortgage -- over their head should be the goal of public policy.
In 2002, President George W. Bush remarked, "I believe when somebody owns their own home, they're realizing the American Dream." This mentality was taken so seriously that putting no money down and having an interest-only mortgage constituted "ownership."
Owning a home makes sense if you can put down a large chunk of money, have a fixed-rate payment that's a reasonable portion of your income, still have a large emergency fund, and vow to remain in the home for many, many years. But most people can't do that. They shouldn't be ashamed. It doesn't make them bad people. But we've created a culture that refuses to accept that many of us could be better off renting. Many renters might even come closer to that American Dream Bush talked about, which is simple financial security and peace of mind.
As Niall Ferguson writes in his best-selling book, The Ascent of Money: "It's not owning property that gives you security; it just gives your creditors security. Real security comes from having a steady income." Bank of America
2. Tax-deductible mortgage interest helps homeowners
Most interest paid on your mortgage is tax-deductible, subject to a few restrictions. This, we've come to believe, is wonderful, making housing more affordable and homeownership more attainable.
But tax-deductible interest doesn't make homes more affordable; it makes mortgages more affordable. That actually increases prices. In effect, homeowners are highly incentivized to drown in as much debt as possible, while equity is penalized. It's one of the most dangerous "gifts" to homeowners.
As New Yorker columnist (and former Motley Fool writer) James Surowiecki notes, "Advocates of the mortgage-interest deduction ... claim that it increases homeownership rates. But it doesn't: in countries where mortgage deductions have been eliminated, homeownership rates haven't dropped. Instead, the deduction simply inflates house prices."
Yes, removing the deduction would raise taxes. But if you've seen the budget deficit lately, you might find that a good thing. Yes, it would also lower home prices. But that would make homes more affordable for those who attempt to own, not just finance, a home.
3. Nonrecourse mortgages are a great thing
Flexible bankruptcy and recourse laws are vital to entrepreneurship and capitalism. If at first you don't succeed, tell your creditors to shove it and try again.
In the 1990s, Silicon Valley practically encouraged a culture of failure. That ultimately spawned Google
But should they apply to real estate? No way.
Many states have nonrecourse mortgages. If ol' Mr. Market kicks you in the groin, just hand the keys back to the bank and walk away. Banks can't go after your other assets, garnish your wages, seize your firstborn ... nothing. You're free to try again.
Some defend this, touting the business benefits of accepting failure. But houses aren't businesses. The meaning of homeownership can't be improved through innovation or entrepreneurship. A thousand years ago, a home was a place to live. A thousand years from now, it'll be the same. As soon as we forgot this, the economy soiled itself and banks like Citigroup
Nonrecourse mortgages don't promote useful innovation; they promote speculation and amplify downturns.
The prospect of full-recourse mortgages freaks many people out. But just about every other industrialized nation has them, and they do just fine. People think twice before buying a home. And as I showed in this article, countries with full-recourse mortgages are less susceptible to housing booms that lead to crippling busts. Some might say that's a good thing.
What do you think? Chime in in the comment section below.
