Thursday, January 8, 2015

Is the American Dream Grounded in Reality?

Smart words for home buyers

Today, as reported by Nick Timiraos of the Wall Street Journal, President Obama uttered a truism rarely heard from politicians: Don't buy a house if you can't afford it. Of course he didn't really define affordability. And that's where many people struggle.

Mr. Timiraos's colleague at WSJ, Jonathan Clements, has a view that's perhaps a little different view from the President's:
Don’t get me wrong: I’m all in favor of home ownership. The tax breaks are impressive. Home ownership forces us to save: With each mortgage payment, we whittle down the loan balance, so eventually we own a valuable asset free and clear. Most important, a home provides us with a place to live.
When I first read that paragraph and the phrase "forces us to save", I thought Mr. Clements had fallen off his front porch: forced savings where you're forced to repay the bank? But he goes on to give the costly downside of homeownership: mortgage interest, maintenance, insurance, sweat equity (with the resulting opportunity costs), and real estate agent transaction costs. In the end Mr. Clements figures he "made just $5,000 a year over my 22 years of home ownership".

Josh Zumbrun, also of WSJ, points out that "for the wealthiest 1% of Americans, only about 9% of their total net worth is tied up in their home. That’s compared to 63% for the broad middle class." That's right: nearly two-thirds of the wealth for this group is tied up in a single, undiversified, immobile, illiquid asset.

There's powerful pressure to stimulate the owner-occupied housing market from builders, real estate agents, mortgage brokers, lenders, and even home improvement firms. Homeowners themselves have a vested interest in price appreciation (though that's mostly paper wealth since homes become less affordable and less marketable to perspective buyers). At the same time state and local governments deriving tax revenue from property taxes want ever increasing home ownership and rising property values.

But all this comes with costs not identified by Mr. Clements: higher tax rates from a tax code that offers a deduction for mortgage interest but not for renters or those that own their home outright; a less mobile workforce that's anchored by that single fixed asset who may owe more than they're worth; an increase in the risk of another national financial calamity from which we're only now recovering.

So bully for the President for speaking with such clarity. But the mystique of the American Dream still clouds our judgement, skews our politics, and makes lobbyists swoon.