Is Too Much Homeownership a Good Thing?

Hemera

For generations the assumption among market participants, policymakers, and the general population has been that increased homeownership is a positive for the U.S. economy. An essay out of the Richmond Fed from June 2011 poignantly questions this assumption and expands on the risks of subsidizing homeownership. Against the backdrop of the SOTU and the likely inclusion of some new housing policy, the analysis from this essay should be a helpful reminder that there is a lot that we still don’t know about the effects of homeownership and its relationship to the health of the aggregate economy.

Here are a few highlights from the Fed paper:

• The Richmond Fed essay points out several costs of homeownership which are typically ignored, including homeowners' lack of mobility, which leaves them exposed to the volatility of local economies and exacerbates problems in labor markets. For example, an employee laid off by an auto manufacturer in Michigan with a mortgage has a diminished ability to move to a region where a job may be available in comparison to a non-homeowner. 
• Another cost, perhaps even more prominent, is the misguided assumption that homeownership is always a smart investment. A lot of wealth for many families is in their owner-occupied home. This (not diversified) asset allocation creates an inordinate amount of risk for the average American. Homeownership has historically been viewed as a good investment since many assume that national prices always increase. However, the recent housing downturn has revealed the flaws in this assumption and made clear the reality: regional real estate prices are far more volatile than national averages. 
• Homeownership has always been deemed a good investment in comparison to the renting, as an owner builds equity and wealth through mortgage payments. However, the Richmond Fed essay points out there are financial benefits to renting, including “flexibility, a better-diversified portfolio of assets, and a degree of protection against local economic fluctuations.” Furthermore, a larger rental market would make the aggregate economy less exposed to housing market prices and risks. (For more information, see e21's "Renting v. Buying: New Evidence Emerges & Informs Housing Policy".)
• After questioning basic assumptions regarding homeownership, the Fed essay examines how government subsidization created unnatural and unhealthy homeownership levels through the use of GSEs and mortgage interest tax deductions. When GSEs buy mortgages from originators, they effectively free up the originator to make more loans. Such a process not only distorts homeownership levels, but also increases the overall risk in the system, which is ultimately passed on to taxpayers though government-provided guarantees against the credit risk from mortgage defaults. Such a system also creates a barrier to private firms, who do not have the implicit or explicit backing of the federal government. The essay goes as far as to argue that “eliminating that subsidy [GSEs] would be the most effective way to ensure an effective and stable market for home mortgages.” 
• Perhaps most interesting was the essay’s assertion that the mortgage interest tax deduction does not actually increase homeownership, but “simply encourage[s] people to purchase larger homes than they were already planning to buy.” Moreover, deductions for payments on mortgage interest are largely regressive. The authors suggest not only eliminating or phasing out these deductions, but also creating a tax-sheltered savings vehicle to help potential homeowners build adequate, sizable down payments. Larger down payments would ensure homeowners have more equity and insulation from downturns in housing.

The essay concludes that “it is not clear that the United States should continue to devote substantial resources toward subsidizing homeownership,” but that if the United States does choose to continue to unnaturally promote homeownership, it must address the GSEs and a tax code that combine to encourage poor risk-management practices (in both the public and private sectors), increased debt, and an overly concentrated consumer portfolio.