Are Americans and Their Government Undervaluing the American Dream?

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Is homeownership
still the American Dream?  Should it be?
An article published in the Journal of Economic Perspectives argues while the former
has long been the case, one strongly supported by government policy, that has
changed.  Now there is a growing school
of thought that the focus should shift toward other aspects of upward mobility.
As the recent changes in the tax code might indicate, government policy is
shifting with it, towards a view that homeownership may not be for everyone.  

The article,
written by Laurie Goodman, Vice President of the Urban Institute’s Housing
Finance Policy Center, and Christopher Mayer, Paul Milstein Professor of Real Estate, at Columbia University,
examines US homeownership from three different perspectives.  The international perspective compares rates
in this country with those of other nations. 
The demographic side correlates changes in the US homeownership with
factors like age, ethnicity, education, family status, and income. Finally,
they look at the financial benefits of homeownership.

America has never ranked
particularly high
among other high-income countries in homeownership. Even when
the US rate peaked in 2005, it was fifth lowest among the 18 countries studied
by the authors and well below their average. Subsequent declines have returned
it to 1990 levels while 13 of the 18 countries increased their rates. The four
others that declined were Bulgaria Ireland, Mexico, and the UK. By 2015, the US
ranked 35 of 44 countries with reliable data and was almost 10 percentage
points below the mean rate of 73.9 percent.

The US is similar in its age patterns
to most countries with the rate peaking at or near retirement. This suggests
that home equity often plays an important role in retirement savings although
it is accessed mostly through rent-free use of the property.

The authors say determining the reasons
behind the differences in homeownership among countries is difficult as each
has its own culture, demographics, policies, housing finance systems, and in
some cases a history of political instability that favors homeownership. Other
studies have pointed a linkage between homeownership and mortgage finance,
pensions, and equity participation. “While not definitive, countries like
France, Germany, and the Netherlands have both lower-than-average homeownership
rates and robust public pensions and private defined-contribution
systems.”  Government tax policy and
regulations that encourage or discourage ownership and/or renting appear to
have a role as well.

The authors note that both the past
increases and decreases in homeownership were more extreme than can be
explained by demographics. Part of the run-up in homeownership in 1995 and in
2005 can be attributed to relaxed credit standards, new mortgage products, and
lowered default rates. Subsequently, in the aftermath of the Great Recession,
homeownership fell with tight credit conditions, student loan debt, stagnant
real incomes, and perhaps a subtle change in attitudes toward homeownership.
Racial and ethnic disparities remain pronounced.  Rates in black households have fallen every
decade, even when controlling for income and demographics.

While homeownership has consistently been
highest among older households, when rates fell sharply after the housing
crisis, it was the younger age groups that suffered the steepest declines.  There has also been a shift toward higher
education as a determinant of homeownership.

Examining the financial benefits,
the authors find that, since 2002, the internal rate of return of homeownership
is quite favorable compared to alternative investments, even during the housing
crisis when home prices suffered the worst shock since the Great Depression.

While not the only reason, the
treatment of homeownership by the tax code certainly helps increase its
financial benefits although these results vary with the timing of the purchase,
the holding period, and location.

For
example, the authors were able to conclude that, for the metropolitan areas
where data was available, there were higher rates of appreciation in home prices
than in the country as a whole, but average lower returns. This also indicates
that higher-priced homes have a lower cash yield on investment. In most
markets, those who bought in 2007 had lower returns then they would have
achieved through an investment in the stock market.

The
article also looks at whether a change in attitude toward homeownership has
changed the dynamic. Surveys by such entities as Fannie Mae, and the National
Association of Realtors have found that homeownership is clearly still an aspiration
of most, but the surveys don’t put a timeline on the purchase or consider the
difference between aspiration and ability. Other surveys have found that
respondents have a much lower expectation they will be able to buy soon, or
perhaps ever.  There is also a variance
in the aspirations and expectations depending on where the respondent lives
both by region and by urban versus rural.

There
are two aspects to consider when determining if owning a home makes sense, the
financial benefits and the non-financial costs and benefits.  There are very compelling reasons for
Americans to aspire to become homeowners. But this involves a lot of
variabilities such as timing and location of the purchase.  Consequently, comparing the financial returns
of owning versus renting involves a lot of challenges such as valuing quality
differences between a typical rental and an average owner home, maintenance and
capital improvement costs, property taxes, and the returns a renter might
receive from investing the cash that might be used for a downpayment.  There are also challenges in weighing the
values of imputed rent and opportunity costs.

The
authors’ analysis assumes a home purchase in 2002 when home prices were close
to a long-term average. They then compared returns for each year of ownership
through 2016, using a representative median priced home both in the US and in a
selection of metro areas and measured these against the returns from various
alternative investments.

Their largest takeaway was that owning a
home appears to be generally financially advantageous relative to renting,
including whether a homebuyer chooses to itemize homeowner tax deductions.  The mythical 2002 homebuyer would have earned
a higher rate of return on home equity than on bonds regardless of the holding
period, and a higher return than on the S&P 500 with a three-year holding
period or more, once taxes on the alternative investment are considered.

If the homeowner itemized, his investment
would have outperformed all the alternative investments in all years. If he did
not, there were periods where the investment would have underperformed one of
the alternatives during several periods when that investments performance was
extremely high. However,
the ability to build wealth through homeownership is dependent on holding on to
the home during downturns; something lower-income and minority borrowers are
less likely to be able to do, and thus they benefit less from homeownership.

The authors say their overall conclusion is that homeownership is
a valuable institution, allowing families to build wealth and serving as a
measure of financial security. Moreover, the mortgage interest deduction is not
the main source of these gains.

They also
conclude that while government policies in the 1990s and early 2000s may have
put too much emphasis on the benefits of homeownership “the pendulum seems to
have swung too far the other way, and many now may have too little faith in
homeownership as part of the American Dream.”



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