Bankruptcy

Homeownership Myth (Part II)

By Mechele Dickerson

As I argue in the earlier posting, the Sunday Washington Post article raises a number of interesting points about the value of homeownership as an investment device.  I discuss many of these points in an article that will be published this Fall, and ultimately conclude that it is time to debunk some of the myths associated with homeownership. 

The Post article notes that one advantage stock purchases have over home purchases is the relatively low cost to acquire stock and the ease of completing a stock transaction.  A fair point, and one that is even more relevant for potential homeowners who have subprime credit and will generally have higher borrowing costs.  These costs are exacerbated for people who are steered into subprime loans even though their credit qualifies them for lower cost loans, a practice that recent studies suggest seems to be directed at minority homebuyers.

The Post article also discusses the oft-stated view of homeownership as a forced savings device.  At the same time, financial experts in the article argue that owning a home is preferable to investing in stocks because you can borrow more against your homes than you can against your stock holdings.  That homeowners can so easily borrow against their homes, however, means that this isn't as much of a forced savings device as it once was.  So, whatever the benefits of homeownership might be, as long as owners can so easily remove equity from their homes, it's hard to really say that owning a home forces people to save long-term.  And, the fact that so many homeowners are now "upside-down" on their homes (i.e., they owe more than the home is worth) illustrates the pitfalls of encouraging homeowners to treat their house as if it is the National Bank of Home.

Finally, the article extols the federal tax benefits homeownership provides.  Those benefits include the ability to deduct mortgage interest payments and property taxes and also the ability to sell a primary residence and keep certain amounts (up to $250,000, for a single person, and $500,000, for a married couple) tax-free.  Though these benefits collectively represent one of the largest wealth transfers in the Internal Revenue Code, the benefits disproportionately favor higher income taxpayers who are itemizers primarily because lower income taxpayers are more likely to take the standard deduction.  And, because minority homeowners are statistically more likely to have lower incomes than white homeowners, tax scholars (most notably Professor Dorothy Brown who will join the Emory Law School faculty this year) have found that these federal tax benefits disproportionately favor white homeowners.

What has been largely missing in the current debate about the housing crisis is a harsh, realistic look at why we encourage everybody to invest in a house (or, as it's usually stated to "own a home.")  Is it because it's really the best investment device?  Is it because it's the safest or easiest way for moderate income consumers to acquire wealth?  Is it because of the positive externalities purportedly created by homeownership (homeowners are more involved in their communities, homeownership leads to safer neighborhoods, schools are better in neighborhoods that have primarily owner-occupied housing, etc.)? Is it because so much of our economy depends on consumer spending?  Is it because home builders, mortgage lenders, and Home Depot need people to keep buying homes?

So, is investing in a home better than investing in stock?  Well, I guess the answer is still:  it depends. 

Full post as published by Credit Slips on April 29, 2008 (boomark / email).