Bankruptcy

The Myth of Homeownership

By Mechele Dickerson

An article in the Sunday Washington Post asks whether -- given the current housing crisis -- real estate or the stock market is the better investment.  Of course, the answer is -- it depends.  Formulating a longer, more sensible answer happens to be something I've been thinking about for the last several months and is the subject of my current research.  I'll discuss this article in two posts.  Here's the first one.

As the title of one of my forthcoming articles suggests ("The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing"), I challenge this country's obsession with Homeownership and the view that attaining homeownership is crucial to achieving the American Dream.  I'll discuss a few points raised in the Post article to explain how I've reached these somewhat heretical views.

The Post article opens by discussing a financial consultant who created spreadsheets to forecast how money he and his wife had saved would perform in diversified stocks or other financial vehicles.  This is quite sensible, and likely is the way many sophisticated investors evaluate an investment.  The current housing crisis suggests that this is not the way most homeowners approach the decision to buy a house.  That is, many people who are losing (or are at risk of losing) their homes accepted exotic loan products they did not understand.  Others are losing homes that they could afford only if housing price appreciation continued, and interest rates remained low.  Obviously, this was an investment strategy that was doomed from the onset.

Many homeowners appear to have bought homes without carefully considering the risks of the investment, without asking whether this particular investment was a rational one for them to make, and without considering the total costs (both actual and opportunity costs) of the investment.  Rather than approaching the purchase from a purely economic point of view, they bought homes because we have all been told that homeownership is the best way to accumulate capital, that homeownership is an integral part of the American Dream, and that, as the article notes, homeownership is "one of the basic tenets of this culture."  People purchase houses because they fear that others will think they are a financial and social failure if they continue to rent, or that there must be something wrong with them if they are adults (especially if they are parents) but still haven't found a way to buy a home. 

The financial consultant in the Post article ultimately decided to purchase a home because of family and social reasons, not monetary reasons.  Again, this is the reason many people buy homes.  Which is ok, as long as they understand that these reasons may cause them to make an unwise financial decision.

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