This one’s from Kevin Drum:
Irrational exuberance anyone?
Inspired by this New York Times piece which shows that new home-buyers think their homes will gain value at about 10% per year over the next decade, Kevin asks:
So here’s the question: why do people think that home price appreciation is a law of nature, when it so clearly isn’t?
He has a few theories which are all probably part of the problem: Americans can’t do math; they can’t adjust for inflation; the media and anecdotal evidence of home sellers flush with cash have skewed how we think about home ownership; some areas really have done very well even adjusted for inflation, etc. But I think the underlying issue here is that owning a home is just what people do in America. It’s the American dream. If you don’t own a home – well what the hell is wrong with you? Don’t you love America? What about your children?
I don’t own a home myself. Renting seems like a pretty decent option with the market the way it is, with very little savings – certainly not enough for a real down payment – and with more and more holes piercing this particular illusion I guess I just don’t feel like gambling. Besides, I don’t like to be tied down any more than I already am. A part of me wishes I could purchase a home, but I realize that a lot of that is purely gut feeling, subconscious obligation to a social norm; the second unsung stanza to the “first comes love, then comes marriage” rhyme.
What bugs me, as a renter, is all the effort that’s gone into subsidizing home ownership – both prior to the crash in the form of tax breaks and zoning favoritism, and after in the form of one government program after another attempting to prop up housing prices – which in turn artificially bolsters high rents. I understand the impetus here – propping up the housing market makes for a softer landing across the rest of the economy. But I don’t think it’s wise or a good use of tax dollars. If anything it’s a transfer of wealth from the poor and working class to the middle and upper class. Of course, as Kevin notes, the myths we’ve woven up around home ownership have likely “distorted the housing market every bit as much as all the government intervention in the world.”
No easy answers to this one.
Cacti
I remember living in Southern California during the height of the real estate bubble, where a 2 bedroom house in the most working class of neighborhoods was going for $600k.
I don’t understand why anyone thought it would last.
Nick
@Cacti:
Because when you’re doing shots at a bar with hot girls (or guys depending on your preference, I don’t judge), you never think about the hangover.
Lynne
It’s true. There are no easy answers. How do you answer the argument, well renting is just throwing money down the drain because you could be spending just a little more every month and eventually the person who owns your place is you, instead of a landlord? Of course, if rents were much lower that wouldn’t be as much of a problem.
Joel
Part of the appeal – for me – about owning a home is being able to reshape said home in my own image. As a renter, you can’t make any fundamental changes to your domecile.
That said, having a landlord to deal with all the issues that pop up, and I have a great one right now, is a nice argument in favor of renting.
Tim Connor
Krugman wrote about this multiple times before the bubble broke. I dumped my house at a decent price in consequence.
Did you write about it before the bubble burst?
arguingwithsignposts
One certainty is that back in the halcyon days of the “Middle Class,” where blue- and white-collar workers could spend their entire lives at one job, it made sense to own a home. I would suspect that for the vast majority of Americans who owned from the 50’s through the 70’s (at least), a home was just that – a home, not an ATM or a chance to flip something for some sweet fast cash.
Were I certain I’d be where I am in 20 years or so, I’d be more willing to invest in a home. Home ownership under the right circumstances can make a neighborhood.
Unfortunately, that’s not the world we live in today. I’ll keep renting, thanks. I don’t want a six figure boat anchor hanging around my neck if I need to move for some reason (already done that once).
Also, the home mortgage interest deduction is a really sweet giveaway for homeowners. I wish there was something similar for renters who are penalized for not buying property.
ETA: I was fortunate to be able to sell my previous house in early 2007, after it sat on the market for 8 months. Even at that early date, I knew the gravy train was coming to an end, and was fortunate to get out without losing my shirt.
sven
A 10% increase over 10 years is roughly equivalent to a 160% increase in price or a new price at 260% of today’s price.
I would be really interested to know how the NYTimes arrived at its estimate. Behavioral Economists have shown that the framing of this sort of question has enormous consequences for the answer derived.
If the question was:
and the mean response was an increase of 160% I would be a little surprised and very depressed.
If the question was:
I would be totally unsurprised and frustrated with how the question was asked. On almost any question using % people seem to use a really rough heuristic for coming up with their answer. If you ask 1000 renters what a reasonable interest rate on a 30-year fixed mortgage is, I’d be shocked if the most common answer weren’t either 1% or 10%.
If anyone can get past the paywall, I’d love to hear what they say about their methodology.
andrew
@Lynne
If something in the house breaks, I’m not responsible to pay to fix it. If I want to move, I don’t have to worry about what the house is worth at the moment and go through the trouble of selling it.
cyntax
Definitely this.
ppcli
On the artificial supports of the housing market: A Semi-Foreigners’s point of view:
I’ve been here for over 25 years, and I finally even became a citizen. But I still shake my head in disbelief every time I remember that mortgage interest is an income tax deduction. I remember when I first learned that as one of those moments of culture shock like when I discovered the marriage licence asked for my race. “This is a joke, right?”
Walker
@Lynne:
Except that in the bubble this clearly was not true. There are things in ownership that you do not get back as well, like insurance and maintenance. That is why you have rent-to-buy multiples; they tell you when you are actually throwing money away and when you would be better off doing something else with your money.
Rent-to-buy multiples were twice that threshold in the bubble. That is why so many of us knew there was a bubble. Hell, they are still that high here where I am in NY because so many ignorant Californians do not know how to valuate property.
Joseph Nobles
People buy that their homes will appreciate 10% every year because that is what they were being sold.
mr. whipple
It was quite insane. The really, really smart people made oodles of money on the crash.
Napoleon
E.D.,
Maybe home ownership is over sold but I recall reading you are in your 20s. But don’t let that blind you to what possibly maybe the best deal of your lifetime. Historic low rates and what I think at some point will be prices under the trend line. I think it is no exaggeration that you quite possibly could buy something at a monthly payment on a 20 year loan that ordinary in even non-bubble times would your payment on a 30 year loan. You could be, say, 45 and free and clear on a house. The best deals are when everyone else is scared to buy and you are not.
Maybe it is me being 49 and I can look back and see obvious good deals I passed on because I was worried what it would get me into.
soonergrunt
Of course, for somebody like me, I spend on mortgage about what I was spending on rent. The homeowner’s insurance on the property is about twice what I was paying for renter’s insurance. The property tax kind of sucks. It was rolled into the rent but now it’s about $100/month more.
So I pay about $150/month more to buy than to rent, and in exchange for that, I get 400 square feet more space, a lawn front and back, and a garage, and more storage space. I get to personalize my space the way I want, too.
And I’m building equity?* What’s not to like?
*So the equity isn’t as much as was suggested originally, but I didn’t believe that 10% per year was realistic in the first place, so no big loss. We engaged in the time-honored strategy of buying the smallest house we could use comfortably in the nicest neigborhood we could get into.
Frank
@Lynne:
If I’m a renter, I don’t have to pay for street construction projects that could happen any time the City Council wants it. We had one where I live totally out of the blue and each home had to fork out over $4,000.
In addition, the trend in our country seems to be to lower or keep income taxes unchanged while increasing property taxes. Whether your home is paid for or not, you will always be hit with property taxes. And likelihood is that they will keep going up.
mr. whipple
That would be me. Unfortunately, as soon as it was paid off we needed a new roof, fence, etc. Next year it’ll be the furnace and AC. The torture never stops.
On the other side, I could not imagine renting an apartment or condo. Really love the homestead.
New Yorker
Amen brotha. What makes me roll my eyes about the wailing and gnashing of teeth over today’s housing report is that it was inevitable. Eventually the farce of tax credits and stimulus for the housing market was going to end, and boom! the whole thing would continue its free-fall.
Omnes Omnibus
The buy versus rent calculus is going to be different for everyone. It is hard to say someone’s decision one way or the other is right or wrong.
Roger Moore
@Lynne:
Simple: most of the money a home buyer spends goes down the drain, too. All the money I spend on maintenance, HOA dues, mortgage interest (less the tax break), and property taxes (also less the tax break) is also money down the drain. I’m also losing the use of the money I spent on a down payment, which might otherwise be earning me interest. Only a relatively small fraction of my total home ownership costs come back to me in the form of increased equity or tax breaks.
jl
There are two factors I do not see mentioned by Drum or others.
One is social engineering by industry, Greenspan and Bush II’s ‘opportunity society’, and stock market cheerleaders (for example, whoever wrote the book Dow 36000).
The other is a desperate search for a way to obtain and store wealth. What is left for the middle and working class other than hoping to get in the ground floor of a financial and real assets price boom? A profession or trade? Dependable retirement plan? Union labor health, disability and retirement benefits? Even the promise of Social Security benefits people have paid their hard earned dollars into have been dishonestly thrown into doubt.
I think there is a synergy between the two. I think a very real, if not often discussed, implication of the ‘opportunity society’ was that there were going to be virtuous and deserving winners and sad and lost undeserving losers. People wanted to find a way to be winners.
Also, in some conservative quarters, there seems to be a double standard. Strong financial reform is slammed as heavy handed and might stunt economic growth because bubbles are difficult to call, even by experts. But it is OK to slam middle and working class people who were trying to get in on the ground floor of the ‘opportunity society’ for not seeing what is now is called an obvious bubble.
J.W. Hamner
While not beating inflation makes it impossible to get rich from your house… the enforced savings of a mortgage payment is not a bad thing. Many people who make the argument that renting is better than buying would be assuming you are putting the difference into investments and getting decent returns… which I suspect most renters aren’t doing.
mr. whipple
Maybe it nets out that way, but as a working class shlub I got my first house with an FHA loan that required only 3% down. The tax write off was nice. That house helped me build equity for my second house, and in the meantime I had my own little castle.
mclaren
@Cacti:
Because it has lasted. It lasted for more than 25 years. Ever since the early 80s, housing prices have been way out of line with income in southern california and the northeast.
When something lasts for 25 years it’s hard to believe the trend can come to an end.
In fact, we are seeing a lot of that same know-nothingism on this forum. A number of people have dismissed the obvious conclusion that things can’t go on like this with pabulum like “The housing market has dipped before, and it always comes back up” or “People have been saying that about California for decades and California always bounces back.”
Well, look at the charts. The trend lines on a whole bunch of policies are simply unsustainable. Health care costs continue to rise at double-digit rates. The U.S. military-industrial expenditures keep going up at 8% per year compounded. High-wage high-skill jobs keep getting offshored at an accelerating rate. College tuition keeps rising at double-rates year after year.
Just like housing prices far out of line with personal income, these trends are not sustainable. Something has got to give. As economist Herb Stein said, “When a trend is not sustainable, it has a tendency to end.”
But a lot of people on this forum dismiss that reality. A lot of you simply declare “You’re saying this time things are different and they never are.”
Well, buckaroos, sometimes things are different. The monarchies that ruled Europe learned that after 1918, and the Communists who ran Russia learned that in 1989, and now methinks the capitalist Wall Street robber barons and housing barons are learning that in America.
In order to defeat the Soviet Union, we turned into them. Now we’re following that process to its logical conclusion and disintegrating.
The Cold War proved that communism doesn’t work — but the end of the Cold War is now proving that capitalism (as we know it) doesn’t work either.
Emma
And there are some of us who ended up buying because it was a way to avoid having to deal with landlords who thought nothing of tripling your rent, coming into your house to “inspect” a problem and then not coming back to fix it for six weeks, or, the prize winner, the woman who was renting out her childhood home and didn’t want any changes made, even though the wallpaper was peeling and moldy and the floors, which her father had put in with his own hands, were a danger to anyone entering the dining room.
On the other hand, we kept ourselves well below the “maximum we could borrow” and so even in a market (South Florida) where home value is tanking, our house is still outpacing our mortgage. Not by much, but still…
sven
@jl: The Author of Dow 36,000 is Kevin Hassett.
Interesting things to know about Kevin Hassett:
AFTER the publication of Dow 36,000 and subsequent stock market collapse(s) (2001, 2008) he has….
1) Been named Director of Economic Policy Studies at the American Enterprise Institute (2003)
2) Written a weekly column for Bloomberg (2005)
3) Been a senior economic advisor to the McCain presidential campaign (2008)
BeccaM
But there’s one small detail you’re leaving out, E.D.: In order to rent a house or apartment, someone else has to own it, so they can rent it to you.
Part of this whole ‘American Dream’ thing is to get out from under the thumb of landlords who tell you that you can’t hang pictures where you want, can’t plant a tree or put in a garden, and who, whenever they like (subject to the lease agreement and local laws, of course) can sell the property.
I’m in my late 40s; my wife is in her 60s. We are TIRED of moving from place to place and want to settle down somewhere. We’d like to put in gardens, maybe build a workshop for her woodworking equipment.
But right now, due to the fucked up mortgage market and the fact we were out of the country for a few years, we’re having trouble qualifying. We’re living in a nice rented house now — but in less than a year, we have to move again because the owners want it back for their retirement.
While I agree there’s been entirely too much government support for home owners while leaving renters out in the cold, the answer isn’t to make everybody rent from the rich fat-cats who snatch up all the real estate. The answer is good jobs, and a decent income, so that the own vs rent decision is an actual choice base on lifestyle and preferences, and not whether there’s a real estate bubble going on or the banks would rather gamble on the stock market than to write mortgages.
jl
I also don’t think the reality of what people perceived is captured by the aggregate statistics. During the boom, people who argued against a bubble presented regional statistics showing that except for certain obvious suspects (such as California and Florida) there was no obvious or historically unprecedented bubble in most parts of the country.
I think, on closer inspection, these studies were weak. They used arbitrary definitions of regions that artificially lumped and split housing and commuting markets (at least from what I know of CA, NV and AZ). They also were sloppy about determining the uncertainty in their estimates of average prices. Once you dug into the numbers, there were signs of bubbling in many areas. But how many people have the time to dig into one of those studies, or know where to get data to check things out? Not many. They just read the headline, usually in the business section, which they do not realize are often very compromised wrt to objectivity.
I followed the debate, since I believed that there was a bubble big enough to cause a recession early on. There was considerable debate, propaganda by industry and other interested parties masquerading as analysis, and honest disagreements among analysts until late in the game.
tom p
many years ago, I bought a house… because that was what people are supposed to do.
Wrong house, wrong place, wrong wife…
Afterwards, I said never again. Too many things to do, too many places to see. Well I have now done most of those things, seen many of those places. I have found the right house in the right place, with the right wife….
and this is where I am going to die.
Robert Arctor
The other good thing about you and others renting is that you can’t walk away from your mortgage just because you don’t like the fact that you’re underwater on your loan.
CalD
I’m still annoyed that my ex-wife wouldn’t go along with buying a place in 2000.
Larkspur
This is sort of OT, but I’ve been straining my wee brain, so I intend to share.
Okay, so many many years ago (about the time Jimmy Carter was getting attacked by a giant rabbit), I rented my first really nice apartment. (That means it was clean when I moved in, freshly painted, spotless, decent neighborhood. What an incredibly wonderful new experience!) The rent was a little high for my salary, but this rental company knew my aunt and uncle, who were not ne’er-do-wells, and were renting a luxury apartment down near the water. (They had just sold their beautiful home, and were in the process of buying a condo.) So I got in anyway, because of them.
At that time my rent was $200 a month. I think my salary was in the range of 16,000 per year.
Today my rent is $1,160 per month. So I did rudimentary calculations and came up with the tentative answer to the question: what would my salary be if it had increased in proportion to the increases of my rent? I came up with an annual salary of $92,800.
I am nowhere near screaming distance of that salary. I got significantly above $16,000 per year for a while, then things fell apart.
See? I said it was OT. But it’s just weird how things don’t always work out like you think they are going to. Or like you expect and believe they will, on account of every day in every way, each generation is getting better and better. I am not blaming anyone or anything here. That is another topic. Some Boomers may want to commiserate. Other Boomers and younger folks may want to mock me and my disastrous decisions. Whatever. Have fun with it.
On the plus side, I don’t owe anyone any money, no outstanding debts, and when one of the washers or dryers break, I call an 800 number.
Bad Science
Aw, crap, you’re saying that the mobile home I got in the mid eighties for 20K is better than the house I contracted for two years ago for 40K. What a gyp.
Larkspur
@BeccaM: Your rental dilemma – the uncertainty of the long term habitation – is why I have shyed and/or shied away from individual landlord situations. I rent from a company who rents apartments; that’s their business. They have a range of apartments, from modest ones like mine, to elegant luxury ones. My apartment is never gonna be sold or condo-ized out from under me. But it’s not cozy and homey the way a stand-alone house is.
jl
I think that there were many ordinary people who bought houses that they could not afford who were naive, and some who were corrupt. But I think many were trying to be ‘early adopters’ to a new era and they were trying to make sure that the were smart cookies who would come out on top in the new economy.
I think there were some similarities to the stock market bubble in the late 1990s.
And I am not sure obsessing over housing bubble is most constructive thing to do. I think it was the fragile and corrupt financial structure that facilitated the bubble, and that was very difficult to observe for most people, that fed the bubble and made the consequences of the pop far more dangerous. I think that the shaky financial arrangements are far more responsible for the problems now than the bubble itself, and the natural and eternal susceptibility of populations to manias and panics.
MattR
I am neither a lawyer or an accountant, but don’t landlords get to deduct any interest they pay on their loans as a business expense when figuring out their taxes?
Larkspur
At one point I had an IRA with Vanguard. It increased nicely, until it didn’t, and, naif that I was, I’d call and ask, “Should I move it? Should I take it out of the low to moderate risk fund and into something duller?” And it was always, “Oh no, no, stay the course, the stock market always rebounds, you just have to sit tight.” Eventually, I had to cash it in, so I could pay bills. It was half its original value.
But they’re never going to tell you to hold back, or be super-cautious. Are they? Obviously, I should have asked someone other than a Vanguard broker, but I have dumbitude attacks often.
BeccaM
@Larkspur: Thanks for understanding. Our issues are pretty much what I’ve recounted — we like our privacy, we want to settle down for a long, long time somewhere, we want to be able to customize our home as much as we like (including going heavily into Solar, rainwater catchment, and other green measures), and we want big gardens (including fruit trees) so as to grow our own foods.
We’ve been homeowners before and hope to be again.
Kirk Spencer
As noted above, the calculations are different for various people.
For example, when I calculate rent I have to figure the cost of three dogs and two cats. Since we (me, my wife and my daughter) rescued these five animals we will not abandon them. There’s the non-refundable pet deposit (yeah, oxymoron) per animal and the pet maintenance fee per month per animal IF they allow that many animals at all.
Basically I have to figure double the normal rental rate and accept a significantly reduced range of places.
For me, then, buying is cheaper than renting.
CalD
So what this graph appears to be telling me is that if I were looking to buy real estate right now, I would ideally be looking to try and pay (in inflationally adjusted dollars) about what a similar place would have sold for circa 1995-2000. That’s actually very helpful. Thanks!
morzer
Out of curiosity, has anyone had experience of building their own house? How do costs stack up against purchasing one pre-built, so to speak?
CalD
I’d love to see a study of average floor space per occupant in 1950s owner-occupied housing versus now.
chopper
@Joel:
indeed. my landlord is pretty great, if a bit slow to fix some things. rent hasn’t gone up once in 5 years, which is a big deal in new york.
ownership sounds good, but not out here. it’s not like i could do too much to the place, it’s an apartment. no outdoor space or anything like that.
Napoleon
@Frank:
Huh? Are you kidding? Your rent goes up next time you sign a renewal your rent is going to reflect it.
Anne Laurie
@jl:
@J.W. Hamner:
@BeccaM:
Three related arguments that deserve to be repeated. Plus a fourth facet on that rhetorical diamond: Living with dogs, or even cats, is a lot easier if you have your own property, however tiny. We choose to live with Papillons, who like many small dogs can be “alarm barkers”. It’d be very, very difficult for us to rent an apartment with our three current rescue dogs. Not to mention that two of our cats are indoor-only ex-ferals, now aged 18 and 10… they probably wouldn’t have survived the stress of adapting to a new ‘territory’ every couple of years, even assuming we could find sympathetic landlords.
We love our dogs and cats. I love my garden, pathetic as it is. I grew up sharing a two-bedroom apartment in the Bronx with seven other people, so I’m very aware of both the benefits and drawbacks of high-density urban living. I could do it if I had to, but I’m grateful every day that I’ve been lucky enough to end up here on my own 6600-square-foot property!
Riggsveda
If you like that chart, you’ll love these, over at Michael White’s Seeking Alpha blog:
http://seekingalpha.com/article/221699-the-5-stages-of-america-s-housing-bubble
Even after a 34% drop from an all-time housing bubble high, current housing values are still higher than the peaks of any previous bubbles. Lots more gravity to eat.
(And yes, as a renter myself-and former homeowner-it pisses me off that homeowners are so much more valued as a group even though I pay more in taxes thanks to my rent plus any lack of shelter deduction. If I hear one more politician pander to lowering property taxes I swear I’ll open a vein.)
poicephalus
I don’t know.
I am a renter, and that seems like a pretty reasonable answer to me.
C
Edward G. Talbot
I agree with all the ideas about getting rid of the mortgage interest deduction (though I would only support that if you both create some sort of transition and also eliminate the ridiculous corporate subsidies and breaks) and the general idea of homeownership being overdone.
On the other hand, I would prefer to own than rent for at least two reasons. One is the ability to make my home what I want it to be. Two is the ability not to have to worry about getting kicked out.
I’ll be moving shortly and for the first time time in a decade, my family and I will be renting. By the time we narrowed down the various things we wanted in a neighborhood (schools, open space for exercise, etc), we were down to a couple neighborhoods. We do not want to have to be in a place where we have to worry about neighbors who share a wall or god forbid our ceiling making noise – been there, have the t-shirt. But there are so few houses the size we want (not huge, but I work out of the house and need a dedicated room and one of the purposes of moving is to have family visit, so we need 4 bedrooms) available for rent, our options are severely limited. We wound up renting a 3-bedroom condo because we had to find a place. After 9-12 months, if we’re sure we want to stay, we’ll be looking to buy something.
Renting is one of those things that is right for many people, but too many people dismiss owning your home as a sucker’s bet, mostly because they impose their own needs/wants onto everyone else. For the things that matter to me, owning makes sense. That is true of a lot of my neighbors in my current house as well. Sure, many people don’t do all the math about what their desires are costing, but that is true of all kinds of situations.
PurpleGirl
Omnes Omnibus @ 19: Yes, I agree completely. Before I bought into the non-profit co-op I’m in, my sister wanted my parents to buy me a house. I didn’t want a house — my income wasn’t that good to support paying taxes and water charges, etc., I have back problems that make it hard for me to fix things myself, I wanted to be in a place with an elevator and laundry room (the back problem), and a few other considerations. If anything major had to be fixed like a roof, I’d be stuck. Even small repairs like locking myself out and needing a locksmith could be expensive. Doing the math and looking at the pros and cons of a house versus an apartment in a development, I decided a large development was better for me. There is no one answer, no one-size-fits solution. You have to decide based on your particular situation.
Walker
@morser:
My understanding is that historically (e.g not bubble years), the house minus the land immediately depreciates to 75% of what you paid to build, and then follows the same trajectory as other housing.
dan
The owners pay the taxes so that you renters can have your garbage picked up and you can use the libraries, parks and cops.
chopper
@J.W. Hamner:
well, one thing you have to remember – while the house value may not rise faster than inflation, it doesn’t hurt that the payment doesn’t change at all.
Anne Laurie
@Kirk Spencer:
Which reminds me — I know it is “against the law” to refuse to rent to families with children. In a tight rental market, such as most of the urbanized Northeast, that law and five dollars will get you a coffee at Starbucks.
Kain’s kids are still infants; wait’ll he has to find an affordable apartment with a landlord who doesn’t look askance at two or three rambuntious toddlers. And then he can start looking for a place in the “right” school district — or do what NYC parents have been doing for at least 50 years, and include the cost of parochial school in his future income calculations. Half of my hip, high-education, high-earning peers who bought homes got their original impetus when it became clear that buying a house in a “good” school district was cheaper than the combination of renting & sending their kid(s) to private schools.
Walker
@Dan:
Uh, renters pay those taxes too. They just pay them in rent to the landlord who pays the taxes.
morzer
@Walker:
Actually, I wasn’t meaning as an investment. I was curious to know how the cost of building one’s own house would compare with buying one pre-built. That said, your comment was very interesting. Do you have any sources for it?
chopper
@dan:
yeah, and the taxes are figured into the rent usually. if the landlord’s property taxes go up $1000 a year, you can bet he’s gonna raise the rent to make up for it.
arguingwithsignposts
I don’t think anyone on this board is saying that owning a home shouldn’t be considered, and isn’t a better option for some people. But it’s not the nirvana that it’s painted to be by Big House and the government.
mai naem
@morzer: I have and I have family who have too. Chances are it will be cheaper for you to buy a “used” home. I am talking used and not newly built. The problem may be that if you build yourself you will generally buy better quality stuff which will be a lot more expensive but you will also be building a better house.
As far as housing, I truly believe for the majority of people, it’s good to buy because shelter is an absolute necessity and you might as well have something you will own. It just has to be something you can reasonably afford, not some 4000 sg ft McMansion with a $200 mo. HOA fee.
Walker
@morzer:
Just a work colleague who has both bought and built a lot of real estate. So take it for what it is worth.
WereBear
For us, there’s no pros or cons; we just can’t afford it. The steadiness of renting is something we can budget for: we know what is expected each month, and the rest is on someone else’s budget.
If we had the money, we could pay our rent (representing the pure outgo of taxes, maintenance, interest) and then invest in something else besides real estate; that can be an equally reasonable approach.
But that assumes we have overage to invest; which we don’t.
Roger Moore
This. The mortgage interest deduction is a great example of why tax expenditures are a terrible way of running a government program. If we were to convert the mortgage tax deduction into an explicit subsidy with the exact same economic effect, nobody would want to stick out their necks to support it. But since it’s structured in the form of a tax break, it’s easier to disguise how much it helps the richest people and it’s harder to kill because doing so looks like raising people’s taxes.
BruceFromOhio
@Nick:
Shots for everyone, except you poor folk.
Gaia be damned, forget the kiddies and just flip that crib.
morzer
@mai naem:
All I really wanted was a little Barad-dur of my very own. I need somewhere to maintain my legions and rest my Lidless Eye. Joking aside, I am just gathering some preliminary ideas at this stage, and I do thank you for your response.
suzanne
@morzer:
Well, I haven’t built my own house (though I hope to someday), but I just finished my master’s degree in architecture and I know people who have. And, based on looking at their experiences, as well as what I know of contractors and the costs of construction materials, the answer is… it depends.
The people I know who’ve done it inexpensively have usually bought land that was out in the boonies and held onto it for a while, or land that was, due to local real estate factors, somewhat undervalued. They also had at least enough experience with construction to be able to serve as the general contractor on the house, and some of them have actually been out there pouring concrete and laying brick. So, if you don’t have at least reasonable knowledge of construction, I don’t think you’d actually save much money. Production homebuilders buy standardized materials in bulk, get their permits approved en masse, and don’t really tend to be concerned with energy optimization, so the plans are generic.
The design of the house is an issue, too. Working from a set of generic plans isn’t likely to result in a house that is sited well, responsive to local conditions, or optimized for energy efficiency. All that stuff saves money in the long run. So you might want to factor the cost of hiring an architect in, as well.
If my husband and I stay living in the Phoenix area, my goal is to build us a rammed-earth house. The initial cost is almost sure to be higher than buying a typical frame or concrete-block home, and will require hiring specialized contractors. But with energy prices climbing, it should pay off in the long run.
Omnes Omnibus
@dan: My rent gives the owner the money to pay the taxes. You don’t really believe that owners don’t factor property taxes into the amounts they charge as rent, do you? So no, renters aren’t freeloaders on the property taxes of owners.
Irony Abounds
Well, what the collapsing of the housing bubble means to me is that I am still in the home my wife and I built in 1987 and probably will be for the next 20 years. Since it is the house we have spent the majority of our adult lives in, and the house we have raised our two kids in, it isn’t the worst thing in the world to be stuck here with all those memories.
morzer
@suzanne:
I am afraid the nearest thing I have to construction skills at this point would be my acquaintance with my former brother-in-law, a lying, drunken neer-do-well whose incarceration would benefit society greatly. As you can imagine, such skills would not transfer, partly because my desire to throttle him will probably overwhelm me at our next meeting.
Leaving aside my personal issues, I hope your project goes well, and I am curious as to why you chose rammed-earth. I am particularly curious because this was a standard construction technique in early China, which is an area of professional expertise for me.
BruceFromOhio
Reading some of the comments, renting v owning – having done both, there are pros and cons to both. When I was younger, more mobile for lesser pay, renting was the only way to go. Once the situation stabilized (kids have that effect, or is it the opposite, hrm) owning the joint made a LOT more sense. It gratifies me that I laid into a 30-yr in 1999, with options to re-fi since, and all of the accoutrements mentioned elsewhere. Someday, I expect it to turn around again, and renting will again become much more attractive.
I’ve been lucky to have a profession and a spouse that are flexible.
Scary fucking chart. Not sure whose property has appreciated that much since 2000, it sure as hell ain’t mine.
HyperIon
I wish these guys would follow Tufte’s rule to always show the origin of the plot.
BruceFromOhio
@Larkspur:
No. Every single Gaia-damned one of them will tell you precisely the same thing. I’ve discovered its much more beneficial to do some legwork, get educated, and make up my own Gaia-damned mind. Its my friggin dinero, after all.
suzanne
@morzer:
Rammed earth and adobe are indigenous building methods in America’s Litterbox (a.k.a. the Desert Southwest), too. With the extremely hot summers and surprisingly chilly winters we have, native peoples would build very thick (like 2′) earthen walls that served as heat sinks. The sun can shine on the walls all day, but the walls would be so thick that heat wouldn’t start radiating through the wall until after nightfall, keeping temperatures inside remarkably constant. Also, since all we have out here is shitloads of dirt, it’s a local material, which is appealing to sustainability nerds like me. Plus, it’s amazingly beautiful in a very desert-y way. The Arizona architect Rick Joy uses rammed earth a lot… check it out.
zattarra
Bit surprised by the home ownership hate here. I’ve done both. Much prefer my house. But I understand situations matter. I like the space, our house is much bigger than the two of us need but will allow us to grow our family without having to move. I’m 3 miles from work. 10 miles from 2 other places I used to work and well withing normal driving distance for this area to a ton of jobs in my field. So mobility isn’t killing me. But that’s just me. But I’ll never rent again if I can help it. No connected housing. No apartment going condo and forcing me to move. Good neighborhood, drug dealers aren’t moving in next door or in the complex anytime soon. It’s all good.
Plus, when my fixed rate mortgage is paid off I own something. And I’m not doing this as an investment. When I retire I will pay no rent, just property taxes. Which would be in my rent if I was a renter anyway. So long haul this isn’t an investment, this is the place I’ll live till the day I die.
cleek
people can’t. and they can’t reason, do math, handle logic, empathy, rational thought, avoid bias, change their prejudices, etc..
people are dumb.
it’s a fucking miracle they can even breathe.
Anne Laurie
@BruceFromOhio:
Well, if you’re still in Ohio… My Spousal Unit grew up in Michigan, and we both love the state, but it became very very clear by the late 1980s that if we stayed there one or both of us would always be unemployed. The sacrifice of the “Rust Belt”, and its inhabitants, to the Market Gods has been one of the greatest crimes of the Banana Republicans’ forty-year reign of terror.
We bought our house in the Boston area near the bottom of the previous “housing trough”, which disproportionately affected New England. Its nominal value almost doubled by the height of the latest bubble, and it’s fallen considerably since those giddy days, but it’s still appreciated decently over the last 18 years. Since we bought it to live in, not as an investment, that hasn’t been of key importance to us. In an emergency, we could probably sell this place within a few weeks and not lose money — something that wouldn’t be true of a similar house in almost any comparable Midwestern city (older, working-class, light-industrial town of ~80,000 inhabitants).
J.W. Hamner
@chopper:
True, and in many areas your rent will. I know mine does.
Gardenvarietygator
The prices of houses have been rising for a lot longer than 20 years. More like 60..since after WWII with temporary dips. Thats 2 or 3 generations. I’d say that’s all the reason I need to understand why most people thought houses were safe. I also think the current doom is over blown. It’s fashionable right now, is all. 10 years to get over it is possible, that’s happened before, but forever? Are we going to stop having babies? Population is the most significant factor in housing & land value increase. In fact I’d be interested in comparing that chart to some demographics. Income is also a driver. We know that income has been going up but that it has been mostly favoring the rich. I saw charts before the bubble burst that showed that it was the upper end houses whose value & cost were going up the fastest. the financial structure also played a big part and needs to be addresssed for multiple reasons.
I’ve rented and I’ve watched 2 towns rent market go through a few boom bust cycles before this. Orlando because of Disney and tourism cycles has a history of booms and excitement followed by too much inventory, bust and recover & do it again. this has actually impacted the rental market even more than the buying one. As a pet owner I’ll tell you in the down cycle its easy & cheap to fine “pet friendly” places but when things get excited again you can’t find many and they charge ALOT. My other town is Gainesville which is a classic University town. My grandparents moved here, my father grew up here and has always been interested in investments…this town has the same boom bust about every 7 years in apartments for 60 years of my families memory. The pet freindly apartments can be really hard to find at the high end of the cycle. this blog is full of pet rescuers. If the economy does stay down for years you’ll be able to rent, but eventually when space gets scarcer, your going to have poor choices. Also being able to fence your own yard really dog proof is pretty nice.
I know a lot less about other countries but the tour guides in England said most people rented and that a large percentage of the rentals were owned by just a few really rich landowners. I think they meant out in the small towns which used to be big estates, but as I recall from real estate class long ago, that was a pretty common situation in most countries non US. In fact it used to be pretty common here (not former lords estates, it was just the “sucessful” capitalists) until the US government decided to encourage ownership. Lots of reasonably sized landlords generally give good management because you can rent from lots of others, but if there are only a few landlords….and they know each other, well you are all over their barrel. Plus minorities really get hurt by such patterns.
Swinging back down to a lower % of ownership is probably good balance but there is always a point where its too far. There were actually good reasons for encouraging more self ownership………its just that like everything with humans there is always going too far.
magurakurin
@51
Do you own that rock you live under or do you rent?
Where do deadbeat renters fall on your “to hate list?” above muslims or below mexicans?
Dakota1783
Why would anyone think reason would apply in a Sarah Palin world? Is not free market fantasy, (read teevee reality show) our new realty? Not to mention the angst of ” OMG those poor people, if only, and there is the kicker ED, if only what? No one is giving them a vision much less assurance of the world as is or the world to come…not a happy place… much less a reasuring future to an old and very ancient fear that grips us.. and all our so called leaders are right there with us….priestly they are not.
BruceFromOhio
@Anne Laurie:
IMHO, Michigan has weathered for the worse. Ohio has managed to strike a bit of a bargain for financial services (Columbus) and healthcare (Cleveland) to counter some fraction of the decades-long bleed of manufacturing jobs.
I never thought of my home as an investment. We stayed here because of family and job opportunities in my field. If I thought I could make a go of it in someplace elegant like Boston without having to start over, I’d certainly consider it. We’ve been in one place long enough now that, beneficial or not, the roots run a bit deep. Once the kiddies run along to their own lives it might be different, but for now, this is it.
We’re fortunate that our choices have all been planned, rather than having to deal with some consequence or condition.
Turbulence
There are a few issues here that I don’t think have been explored: (1) our home-ownership subsidies are a way of transferring wealth from poor people to richer people and (2) the home-ownership ethos may serve to corrode social values; maybe the US has a crappy social safety net because the US has such a high homeownership rate. Finally, (3) high home-ownership rates mean that society is committed to not having affordable housing: If all the middle class folks rely on their homes as their primary financial asset, then anything that lowers housing prices (i.e., any effective policy for providing affordable housing) will be political suicide. Since the people who need affordable housing have a lot less political power than home owners, they tend to get screwed. And that’s why it is illegal to build high density housing pretty much everywhere in the US, including major urban centers.
From a paper by a Rutgers professor:
Indeed, Kemeny and Marcuse have each put forward the thesis that homeownership fosters values of privatization that inhibit the de- sire for the public involvement so often deemed characteristic of homeowners (Kemeny 1981; Marcuse 1987). Lundqvist (1998) has performed extensive testing of the impact of tenure form on various kinds of political participation in Sweden, finding no significant substantiation of the thesis except that political party membership is significantly higher among homeowners. However, he finds that the high correlation of education and income with homeownership confounds the analysis and notes that the ideology that property ownership makes good citizens is ‘‘deeply engrained in Conservative thinking the world over’’ (p. 217).
In this article, I argue that from colonial times to the present, a bias in favor of property ownership has been prominent in Ameri- can public policy. Over time, this bias has manifested itself in sev- eral ways: property requirements that denied renters the rights of suffrage in colonial times, land distribution schemes that aggran- dized ownership rather than settlement, and finally a variety of re- gressive federal and state tax policies in which homeowners and the real estate fraternity are enormously subsidized by tenants who are excluded from the largesse they help to supply.
…
In a study of neighborhood development in Minneapolis, sugges- tively titled ‘‘Revenge of the Property Owners,’’ Goetz and Sidney (1994) document the conflict between property owners and lower- income tenants. They found that community organizations were dominated by people who espoused an ‘‘ideology of property,’’ a key point of which is that too much rental housing leads to neighbor- hood decline. Affordable housing policies for renters were to be avoided, according to this dominant faction, because they increase the neighborhood’s concentrations of both poverty and transients who have no stake in the neighborhood. Because property owners are less transient and have a stake in the neighborhood’s long-term well-being, policy should therefore be crafted to provide benefits for them, halting middle-class flight and attracting investment and stakeholders. This ideology—that owners are better citizens than renters—is a modern manifestation of a bias hardened in stereo- types that has misguided American public policy from colonial times to the present.
Scholars continue to produce evidence to debunk these myths. Rohe and Stegman (1994) studied the impact of homeownership on political and social involvement in Baltimore. They focused on a group of home buyers before and after their purchase of a home, comparing them with a control group of continuing renters. They found that the home buyers were less likely to be neighborly than the continuing renters. Although the home buyers were more likely to participate in neighborhood and block associations, they did not participate more than renters in other types of community activi- ties. Moreover, those home buyers who bought primarily for invest- ment purposes rather than for shelter and amenity reasons were no more likely to participate in social and political affairs than renters (Rohe and Stegman 1994).
Community activism was studied in public housing projects and their stressed inner-city neighborhoods in two New Jersey cities by Greenberg (1998). He found that ownership made no statistically significant difference in discriminating between those who were very active in community affairs and those who were moderately active. However, it did play a role in discriminating between those who were very active and those who were inactive: The inactive people tended to be owners (Greenberg 1998).
Larkspur
There’s a neighborhood where I walk dogs now and then. It’s older, not a housing development. Some of the houses were originally summer places for wealthy city people.
I’d seen one of these smaller, older houses for sale a while back. Just the other day, I went past it again. Gone. Complete tear-down to a fairly small patch of bare earth. (I make no judgment here – possibly there were insurmountable structural problems or dry rot or termites or horrible rotten mojo.) So the new owners are going to build what will probably be a delightful smallish house in a pleasant but not opulent neighborhood. It sounds like fun. I would love to build a small eco-house.
Guess how much this tear-down cost – prior to the tear-down, I mean. The actual price of the actual dwelling. I know, because one of the neighbors has access to some real estate information. Nine hundred thousand dollars, folks. As jaded as I am about housing in my area, I was startled by that.
Isn’t it a relief to know that some people aren’t suffering, and are in fact doing quite well? Maybe they will be dog-owners in need of a dog-walker.
brantl
@sven: Dipshit, failing up.
morzer
@BruceFromOhio:
I don’t know that I’d call Boston”elegant” as such. It’s really a concatenation of small towns glued together by force of circumstance and the occasional mall. Somerville, for example, is pretty walkable, decent resources, good public library – but very little in the way of elegance per se. You get some more spectacular individual buildings/ areas in Greater Boston, but overall it’s quite a workaday kind of place. Even Harvard isn’t amazing architecturally, despite the brochures.
glennk1949
I bought my house for 48K in 1978. I feel sorry for people who bought in 2004.
philly71
Get rid of the incentive to buy with the Mortgage Interest deduction which is an indirect penalty to renters and i’ll bet things change. Your post touches on a higher level on this issue, but I wish more people would talk about this deduction specifically. Home ownership continues to part of the ‘American Dream’ because of this deduction. If we got rid of it, it would take the stigma of renting away. Getting rid of this deduction, coupled with living in a more mobile employment age, I feel, would decrease the urge to own, thereby correction the Housing market so that only people who can actually afford them, actually buy homes.
Bob
Well, E.D., there are plenty of tax deductions and loopholes that bug me because I’m NOT able to take advantage of them. Oh, like deductions for dependent children. My view, children should be taxed, or more precisely, parents should be taxed. Perhaps I’d let the first two be tax free but any above that number would carry a tax penalty. Certainly no deduction for a third or 4th.
Erikthered
All I can say is that after renting ’til I was the ripe old age of 38, owning my own home and having a decent-sized piece of land around it to enjoy during warm weather is pretty damn nice.
Brachiator
Once again, we have a lot of fuzzy nonsense from E.D. pretending to be economics analysis.
You can’t either. You depend on professionals to do it for you. And I’d like to see this graph on a log scale, or adjusted for constant dollars on some base year. The results and conclusions might be decidedly different.
Do you know how many of the homes in the period from 1890 to 1910 were on farms? Americans have wanted to own homes because land was available. The alternative would have been the situation in England, where an aristocracy and a landed gentry owned almost all the land, and farmers were tenants. And in cities without suburbs, land quickly is scooped up by the wealthy.
This is an interesting personal anecdote, but useless as any kind of general commentary on the economy. But even here, one question that might be asked is why you don’t attempt to acquire rental property? You don’t appear to see this as an option.
You just have no idea what you are talking about here. What government programs propped up housing prices? And rents have been falling lately. How could that be?
Also, there is no such thing as a neutral tax code. Do you also want to eliminate extra exemptions for spouses or children, or do away with deductions for charitable donations? I understand that the libertarian wet dream is zero or minimal taxes. But as soon as you tax anything, you are going to have a de facto policy that favors some one at somebody else’s expense.
Bullshit. Prove it. And you are also misusing labels that might have some sense in the UK, but which are meaningless here. What distinguishes the working class from the middle class in your eyes?
You haven’t asked the right questions yet.
Turbulence
@Bob: there are plenty of tax deductions and loopholes that bug me because I’m NOT able to take advantage of them.
The issue people have with the mortgage interest rate deduction isn’t that it doesn’t apply to them; its that the deduction makes no sense from a policy perspective. Just about every economist thinks it is a joke. It is a highly regressive transfer that moves cash from poorer people to richer people. Most lower and middle class homeowners don’t itemize their deductions so they automatically get zero benefit from it. The more expensive your house, the more benefit you get, so instead of just subsidizing middle class families that need a leg up, most of the $80 billion subsidy goes to upper income households. Plus, by subsidizing home ownership, we reduce labor mobility, which means it is harder for the economy to climb out of a recession.
There’s all sorts of ways you could fix these problems. You could make it a credit instead of a deduction. You could lower the cap on how much interest you can deduct. You could eliminate the damn thing and raise the standard deduction. Any of those things would be better for the economy and more equitable overall. Alternatively, rich homeowners can continue freeloading off of lower income folks because apparently that’s the American way!
My view, children should be taxed
The problem with your views is that you don’t know anything about economics or policy. If we taxed children, the birth rate would go down a bit. Which means the future economy would be much worse off. One of the long term positives about the American economy is that the birth rate is reasonably high; clipping it means a lot of economic pain for everyone.
Turbulence
@Brachiator: What government programs propped up housing prices?
Um, the home mortgage interest deduction as explained here maybe? It does cost $80 billion per year. On the state and local level, there’s also all the zoning laws that make high density housing illegal to build, even in dense urban areas, which reduces the supply of affordable housing which helps keep real estate prices high.
Also, there is no such thing as a neutral tax code. Do you also want to eliminate extra exemptions for spouses or children, or do away with deductions for charitable donations? I understand that the libertarian wet dream is zero or minimal taxes. But as soon as you tax anything, you are going to have a de facto policy that favors some one at somebody else’s expense.
Wow there is a lot of confusion in a small space here. First, eliminating a tax deduction does not help lower taxes: it increases on taxes on some people. Secondly, do you realize that many liberal economists, starting with Dean Baker, hate the mortgage interest tax deduction and are desperate to get rid of it? Or do you think that Dean Baker is some sort of crazy glibertarian? Third, I’d at least be happy to consider eliminating any deduction you can think of provided that you can make a serious economic argument that doing so would help grow the economy and be more equitable. Many economists, including liberal favorites, can do that for the mortgage interest tax deduction. I haven’t heard any of those same liberal economists make those kinds of arguments for spousal or child or charitable deductions.
Bullshit. Prove it.
You really need to do some basic reading if you don’t understand that the deduction effectively transfers cash from lower income to upper income folks. People can argue about just how big that transfer is, but the direction of the transfer is really not up for debate.
Mark
Brachiator makes some good points. People have gone from getting angry at ED Kain to nodding along with everything he says that doesn’t sound like outright wingnuttery.
Homeowners benefit from our tax laws in aggregate, but individual ones might not necessarily. Here in California, the average property tax rate is highly-dependent on age. People in their 60s (because they typically bought earlier) pay substantially less in taxes on an identical home. A renter who rents a house that’s been paid-off and has a 1979 tax assessment gets a bigger benefit than if he buys a house.
It’s not all fucking cut and dried. Corporations are the biggest beneficiaries of our tax loopholes. Attacking a supposedly middle-class tax break is just dividing the proles.
arguingwithsignposts
@Bob:
Oh, boy. Now we’re dipping into zero growth arguments. FSM this is not going to end well.
Anne Laurie
@BruceFromOhio:
Ditto, absolutely. We know how fortunate we were (are) that we could make the choice for “the rest of our lives” while we were still in our 30s. But I truly believe future historians are going to treat the hollowing-out of the Midwest as one of the great
Republican sins against the middle class political tragedies of 20th-century America.(And of course, the ‘friendly’ competition between The Magical Mitten State and you Buckeyes mandated a little tongue-in-cheek, too also.)
Bob
@Turbulence: Madam, think of my suggestion as a Swiftian “Modest Proposal.”
Turbulence
@Bob: Ah, frack, my sarcasm detector is shot. Sorry Bob.
Dave
Canada has no home mortgage interest deduction. The home ownership rate in Canada is about the same as in the United States. Canadians have about 70% equity in their homes on average, compared to only 45% average home equity in the United States.
The thing that determines the price of a house is how big a monthly payment people can afford.The main effect the deduction has is to allow people to pledge more to the banks in the form of a higher monthly payment. This in turn leads to inflated prices and makes entry into the market more difficult.
Same with property tax decreases-it just allows people to pledge more to the banks and inflates the market.
The NAR lobbied/lobbies hard for the deduction. They are very well-funded. After all, selling more expensive homes makes a realtor more money.
mclaren
@Brachiator:
Have to say, I disagree with that. Kain isn’t pretending to do a lot of economic analysis here, he’s just reprinting a chart from a liberal blogger and commenting on it. The comments are mostly anecdotes. That doesn’t bother me. People have a right to tell anecdotes.
Google is your friend. Here you go, Shiller’s chart adjusts for inflation since 1890.
Not so much. There’s a little difference, but we’re still far above normal valuations, which Kain’s chart also shows. The main difference is how much we’ve come down and how high the peak was, which really doesn’t matter at this point. The big issue now involves how far housing prices have to fall, which is similar in both charts. Shiller’s charts says we need to lose at least another 40% while Kain’s chart suggests we need to lose around 50%. Not a big difference.
Now that’s an excellent point, brachiator. I too view these kinds of long-term charts with suspicion, in part because there was no such thing as a 30-year mortgage back in 1890 (you typically bought a house with a 5-year mortgage back then, and made a huge downpayment), and in part because as you say there’s a real issue whether we’re talking about houses that were part of farms, or houses in town. Most people in America lived on farms and built their own homes, I would guess, around 1890, so having a home in town meant that you would be more like someone who today has a penthouse on fifth avenue. So these kinds of charts are comparing apples and oranges when they go back to 1890.
Here I must strongly disagree. Take a look at Shiller’s chart. You’ll notice a big spike in home prices starting in 1946. Why is that? It’s because of the GI bill and the home mortgage deduction. That all started after WW II with a bunch of laws that provided government subsidies for home ownership. Those laws have continued up to the present time. Ever since WW II, a number of changes in government laws have strongly encouraged home ownership in America.
Source: “Feds rethink policies that lead to home ownership,” USA Today, 11 August 2010.
That’s a good point. Kain seems to have been offering a personal opinion about his own experience with renting, though. And he seems to have labeled it as that.
When Kain remarks “But I don’t think [the home mortgage deduction is a] wise or a good use of tax dollars. If anything it’s a transfer of wealth from the poor and working class to the middle and upper class,” he’s on shakier ground.
There’s some evidence on Kain’s side here. What he’s talking about is the regressive nature of the home interest mortgage deduction. Poor people don’t get it, and rich people get a real free ride. Bill Gates got a deduction on his home mortgage payments. That’s clearly unfair. Home mortgage deductions should be capped at some large value — say, a million bucks.
From the USA Today article:
The phenomenon of people chained to their houses by underwater mortgages is a recent one, so we can’t generalize that and say it makes homeownership bad per se. I’m also skeptical about the claim that cities with high homeownership rates lag behind other cities in job creation and earnings. In San Francisco and Manhattan, for instance, homeownership is low but median incomes are very high and job creation is good.
So the evidence for Kain’s criticisms of the home mortgage deduction seems mixed. But there is some basis for criticism. Once again, I think you guys are being unfair to Kain. Calling his entire post “a lot of fuzzy nonsense” just isn’t accurate. But Brachiator makes some good points, though, even so. That said, Kain could stand to provide hard evidence for each point he makes. Often there is hard evidence to back up what Kain says but he doesn’t include a link or a quote from a source.
Jman
I was never able to take any mortgage interest deductions. Bastards! What about your family E.D? How about a stable environment for the kids? Schools, neighborhood, friends and all that? How many times are you going to uproot them so you can wander off to another short term job? You are young and smart. How about taking up a profession that allows you some stability and professional status and affluence. You could afford a home and down payment. You could wait until home prices hit the sweet spot and save for a down payment until then. You could afford a fence around the back yard so the kids could safely play with the two rescue dogs from the local shelter. You could do it all on personal responsibility, sense of community and family. You could stop making excuses and running away from expectations. And you could leave the front yard unfenced so you could yell at the 10-year-old kids running through the neighborhood to get the hell off your hard earned lawn. Life is good E.D., go for it.
Brachiator
@Turbulence:
Not necessarily true. A lot of this depends on the state you live in. Also, unless you eliminate the standard deduction, you can’t easily talk about who gets, and who does not get, a tax benefit from home ownership. Also, you ignore potential write-offs from property taxes, which are available to some degree even for non-itemizers.
Again, not entirely correct.
Having kids reduces labor mobility. And do you really think that the solution is to reduce all Americans to itinerant laborers, moving from job to job?
And how would this be better? Would this be a refundable or non-refundable credit? Would it be an AMT preference item?
This has been done before and pieces of it are still in the tax code.
This has also been done.
Really? You have not shown the costs of any of your alternatives.
Who’s a rich homeowner? I realize that you are reciting some of Dean Baker’s arguments, but do you understand the consequences of implementing his proposals?
Interesting pseudo-libertarian view that zoning laws reduce the supply of affordable housing. Incomplete and wrong.
RE: Also, there is no such thing as a neutral tax code. Do you also want to eliminate extra exemptions for spouses or children, or do away with deductions for charitable donations? I understand that the libertarian wet dream is zero or minimal taxes. But as soon as you tax anything, you are going to have a de facto policy that favors some one at somebody else’s expense.
Do you know the difference between exemptions and deductions? And I asked a specific question about which exemptions and deductions that E.D. might also like to see done away with in the name of fairness or neutrality. I did not say that eliminating a deduction lowers taxes.
There is no such thing as a liberal or conservative economist. There are only good economists (very rare) and charlatans. This is not the same thing as being a liberal or conservative or libertarian economic policy advocate.
I find it odd that people like Baker have a deep affection for a 19th century model in which there is a core of aristocratic or oligarchic owners of rental property who paternalistically operate as landlords to renters. These people often are not poor and all these pro-rental policies would only increase their wealth. Also, I find it curious that Baker and people like him are hot to eliminate the mortgage interest deduction for individual home owners, but would apparently maintain it for owners of rental property.
You do realize, don’t you, that growing the economy and being more equitable are not necessarily the same thing?
But off the top of my head, I would nationalize unemployment compensation (this helps the mobility of labor), keep the exclusion for a portion of unemployment benefits, make the moving expense deduction a partially refundable credit, and allow taxpayers to recognize part of the loss on the sale of their home, which they currently cannot do at all. I would also increase the Earned Income Credit for single filers and cut back on the additional child tax credit.
Really? You do realize, for example, that there was a time when non-itemizers could still take a portion of their charitable donations as a deduction against their taxable income, and that there was a debate on the economic impact of eliminating this. Poor people were hurt the most. Liberal economists are afraid to look at sacred cows such as the Earned Income Credit or the Child Tax Credit. The Child Tax Credit, by the way, was particularly loved by the right wing Heritage Foundation because they love anything which they can push as pro-family.
But this creates perverse disincentives. For example, the tax rate is higher for single people than it is for married couples or single people with kids who file as head of household. And so, a single parent can lose some tax credits if she or he marries an unemployed or non-working mate.
Also some states have a renter’s credit, which the feds could also do. But California, for example, severely restricted its renter’s credit because of the state budget crisis.
It’s more complicated than this. People who make this argument tend to ignore income mobility, instead assuming that income groups consist of static groups of people and they always fudge the numbers when comparing homeowners vs renters who have the same amount of household income. And as I noted before, these people also tend to ignore how renting transfers wealth to property owners.
Turbulence
Again, not entirely correct.
This isn’t a refutation worth refuting. Obviously, one sentence will not capture the full complexity of the mortgage interest tax deduction which spans several pages in the tax code. But the basic truth of the code is that people with more expensive houses get to save a lot more on their taxes than people with inexpensive houses and that much of the benefits accrue to upper income people living on the coasts.
Having kids reduces labor mobility.
I don’t see an argument here. If you would like to take the time and expand this into an actual argument, I’d be happy to consider it, but as it is, your non sequitur seems irrelevant to the discussion at hand.
And do you really think that the solution is to reduce all Americans to itinerant laborers, moving from job to job?
Do you really think that Detroit auto workers who have been laid off should be trapped in Detroit forever, even when they can get a good job in other parts of the country? Man, you must really hate Detroit auto workers….Also, have you stopped raping your dog yet?
Interesting pseudo-libertarian view that zoning laws reduce the supply of affordable housing. Incomplete and wrong.
Wow! That’s quite a counter argument. Wait, actually, you didn’t make a counter argument at all. Why don’t you let me know when you grow up enough to make actual arguments that involve more than just name calling. I don’t feel like being lectured on real estate economics by a guy who apparently did not know that the home mortgage interest deduction existed.
Do you know the difference between exemptions and deductions? And I asked a specific question about which exemptions and deductions that E.D. might also like to see done away with in the name of fairness or neutrality. I did not say that eliminating a deduction lowers taxes.
Yes I do know the difference. If you weren’t trying to claim that eliminating a deduction leads to lower taxes, then what the frack was your mini-rant about ED and lowering taxes to zero about? Do you have some sort of mental condition that compels you to accuse people of trying to eliminate all taxes when they talk about eliminating tax deductions?
I find it odd that people like Baker have a deep affection for a 19th century model in which there is a core of aristocratic or oligarchic owners of rental property who paternalistically operate as landlords to renters.
I find it odd that you’re so ignorant about the rest of the world. There are lots of wonderful places that don’t go nuts subsidizing home ownership. Places like Canada. Or Germany. Or the Netherlands. Their home ownership rates might be lower than others, but their societies are quite nice and don’t look anything like 19th century aristocrats lording it over peasants.
These people often are not poor and all these pro-rental policies would only increase their wealth.
Well, Robert Schiller has written about how in the long run in the US, housing is a really shitty investment. Given how irrational people are in their beliefs that housing leads to wealth, I think that even without the tax break, there would be plenty of irrational landlords happily renting out their properties at a loss or near loss.
Also, I find it curious that Baker and people like him are hot to eliminate the mortgage interest deduction for individual home owners, but would apparently maintain it for owners of rental property.
Interesting. Cite?
You do realize, don’t you, that growing the economy and being more equitable are not necessarily the same thing?
Of course I realize that. That’s why I think that policies which both (1) grow the economy and (2) make the economy more equitable at the same time are rare and really awesome.
Dave
@morzer: Speaking as a former Bostonian of 12 years (and not a “Greater Bostonian”, but someone who actually lived within the city limits the entire time), Somerville is…this place out on the Red Line after Cambridge that has like one interesting square (Davis) and is otherwise pretty dull. A dense, formerly blue-collar, streetcar town, but a town nonetheless. And anything outside of the core of Brookline/Boston/Cambridge/Somerville is full-on suburban nowheresville. What’s Needham or Malden or Wakefield? Some stop on the commuter rail.
So yeah, Somerville isn’t “elegant”, for sure. But as for Boston (as in, the “City of”), there’s quite a bit that is – and that a fair swath of the general population can afford to live in, assuming one is fine with (a) renting and (b) foregoing the expense of a car.
Dave
I really don’t get why E.D. sticks in some folks craws – guess some folks can’t let go of their own personal ideological “the world is black & white” schticks and I guess. To quote my generation, “whatever”.
Gotta agree with E.D. (and Robert Schiller), sinking money into a home and expecting it to do anything more than keep up with inflation (if at that) over the next 5-10 years ( and likely longer) seems a bit of gamble of one’s hard-earned ducats. If I need an inflation hedge, I’ll just invest in TIPS, which as U.S. Treasuries, carry closer to zero risk than any other asset of any asset class.
Looking at that graph (which IS in constant dollars – that’s what the title “inflation-adjusted” means), just makes one let out a long whistle. We still have a long way to fall. Even hear in Oakland (CA), a “transitional” community in RE-speak, where the bottom completely fell out on overpriced homes, even condos are fire-sale prices in buildings with less than half the units sold are still no bargain. (Sure, you can find a bargain in single-family homes in certain neighborhoods, but that involves a willingness to dodge gunfire).
Even after accounting for the “now you can take the mortgage interest deduction + deductions for local & state taxes” thing, you still get more value in renting. I get 850-ish SF, hardwood floors, french doors, walk-in closet, built-ins, 1 block from subway for half the monthly nut on a condo. Plus I can walk away when I want or need to. And since I’m not a crackhead (or a moron with bad taste), the landlord is pretty much open to whatever cosmetic changes I feel like making.
Course, we got rent control here, which tends to equalize the political power between the haves and the have nots, at least when it comes to housing.
Brachiator
@Turbulence:
Lots of interesting hedging here. But the benefit depends not only on interest paid, but also property taxes, filing status and tax bracket and the state and deductibility of state income taxes. And then there’s always that little devil AMT. Have you actually read the relevant sections of the tax code?
RE: Having kids reduces labor mobility.
Simple. You seem to think that people who rent can more easily pack up and move to a new work location than people who own a home. But people obviously have connections to their community, including kids in school, other family considerations, etc.
RE: And do you really think that the solution is to reduce all Americans to itinerant laborers, moving from job to job?
What an odd response. Do you think that home ownership is the main thing shackling auto workers to Detroit?
As an aside, I also offered some possible changes in tax law to help unemployed workers, so clearly I don’t hate them.
RE: Interesting pseudo-libertarian view that zoning laws reduce the supply of affordable housing. Incomplete and wrong.
You didn’t offer an argument. When you do, I’ll offer more of a counter argument.
This is quite funny. And close to name calling. But you dodged issues that I raised about AMT, phaseouts, refundable and non-refundable credits, etc as it relates to the mortgage interest deduction. There are also income limitations, reduced as part of Bush’s tax plan, but scheduled to be re-instated. I think I could safely bet that I know more about taxes than you do, but if you want to quote tax code, bring it on.
RE: I find it odd that people like Baker have a deep affection for a 19th century model in which there is a core of aristocratic or oligarchic owners of rental property who paternalistically operate as landlords to renters.
And yet, as another poster pointed out, Canada has home ownership rates close to that of the US. Shouldn’t they be a nation of renters? Also, the highest marginal tax bracket in Canada is 29 per cent, lower than ours, and Canada does not tax any capital gain on the sale of a personal residence, while the US has an exclusion, but still may tax some of the gain. So even though Canada doesn’t allow a deduction for mortgage interest, other aspects of their tax system gives a bigger break than US taxpayers in a similar situation. Or didn’t you know that?
And you still evade the question. Doesn’t renting transfer income from poorer people to wealthier property owners?
RE: These people often are not poor and all these pro-rental policies would only increase their wealth.
All housing, including rental property?
Please explain how a landlord could rent property out for a long period of time at a loss? This would be interesting new math economics, and the hundreds of Forms 1099-A that I reviewed this past tax season for foreclosed rental properties must be some kind of optical illusion.
And of course, there are rules that disallow rental losses if the property is not rented at a fair rental value price, which make it hard for a landlord to happily or unhappily rent properties at a loss or even a near loss.
RE: Also, I find it curious that Baker and people like him are hot to eliminate the mortgage interest deduction for individual home owners, but would apparently maintain it for owners of rental property.
You invoked Baker. You should know and be able to tell us how he views the deductibility of mortgage interest and property taxes for rental property. How about points? Or depreciation? Or the categorization of rent as passive income.
RE: You do realize, don’t you, that growing the economy and being more equitable are not necessarily the same thing?
But since being able to do both is rare, which do you choose to emphasize? Would you eliminate the child tax credit, since this is not equitable with respect to singles and childless couples? If not, why not?
E.D. Kain
@Napoleon: Totally – I just happen to live in a very expensive area so it’s still tricky even with the good rates. I’m not against buying. I just think it’s oversold in our society. I may end up buying someday, it just isn’t the same priority for me that it was for my parents’ generation.
morzer
@Dave:
Speaking as a Bostonian of 17 years, and one who has lived in a variety of areas there before settling in Somerville, I said that there were buildings and areas within Greater Boston that were elegant. Overall, though, the city remains a conglomeration of smaller areas and is not among the great cities of the world by any means. It lacks real parks, its MFA is relatively small, and it simply isn’t organized architecturally in a way that could be considered elegant. It has a number of considerable virtues: good public transport, a good public library system, access to reasonably cheap food of decent to good quality. Nonetheless, overall, it is a relatively generic product of urban sprawl. I will add that I’ve seen and lived in worse cities – New Haven comes to mind – but I’ve also lived in some rather elegant cities across the globe, and with all its good points Boston doesn’t even come into the conversation.
E.D. Kain
@BeccaM: Yeah there’s a lot of really big downsides to renting, no doubt about it.
E.D. Kain
@Bob: Why? Do you not understand the importance of population replacement? The way a younger population supports our entitlement system? The way steady population growth keeps a society vibrant?
E.D. Kain
@Turbulence: You handled that nonsense admirably.
Yutsano
@E.D. Kain: That seems a wee bit too close to licensing parents for me. Which leads to rather undesirable effects like eugenics and racial purification schemes. And then we end up blaming the whole thing on hip-hop…
DPirate
Let’s assume for a minute that home ownership versus renting is an economic wash. Or perhaps even that ownership is more expensive (which considering what you get for it it generally is not).
Now imagine two old fogeys who are getting put into the nursing home. One is an owner and one is a renter. Which one is going to be more comfortable in his old age? The one that loses his security deposit cause he shat himself on the carpet? Or the one with 100,000$ equity?
mclaren
Actually, both Turbulence and Brachiator have made some excellent points. (Despite the catfighting, which is minor.)
Brachiator’s strongest points I think involve the fact that home ownership is clearly plenty high in other countries like Canada, so the notion that the current American tax system is directly responsible for high rates of home ownership doesn’t stand up to scrutiny. That means that Americans have high rates of home ownership mainly because of something cultural, and the data seem to support that. Some other cultures view lifelong renting as the norm, but outside of a few outliers like Manhattan, that’s not the case in America.
So if Americans have such a strong desire to own homes, it makes good sense for our government to help with that goal. That’s a powerful point and it’s hard for me to see how Brachiator can be faulted for that insight.
Second, Brachiator is pointing out that there are a lot of other ways of balancing the regressive tax-gift-to-the-rich aspect of the current mortgage deduction than by eliminating it outright. That would hammer the middle class hard, since a home is the average person’s main asset.
A much better solution would be to tax the rich at much higher income rates and fold in capital gains as normal income at those higher rates, then lift up the minimum income at which poor people get taxed and add on an increased Earned Income Tax Credit on top of that. I think the bottom income level that gets taxes is somewhere around 8500 dollars a year or thereabouts. By rights, that should really be pegged at around 125% or 150% of minimum wage, because you can’t live on minimum wage anyway. That would make the minimum taxable wage something like 18,000 dollars for a single person, and instead of a couple hundred dollars in EITC we should boost that to several thousand dollars and offer it as a direct rental credit.
That’s much less regressive than just ripping the entire home mortgage deducation out of the tax system. Oh, and also we should definitely cap the mortgage deducation at a home value of a million dollars or so, give or take. CEOs with ten million dollar homes should not be getting a mortgage deduction for more than the first million of that mansion.
So Brachiator makes some very good points.
But Turbulence also makes a powerful point when he says “…rich homeowners can continue freeloading off of lower income folks because apparently that’s the American way!”
This is the big weakness with the current home mortgage deduction. Wealth creeps get a huge windfall. But rather than throwing out the baby with the bathwater, we would do better to cap the mortgage deducation at some high level rather than axing it entirely.
Turbulence also makes a good point that home ownership reducing mobility, and this can hurt people when their jobs evaporate. Brachiator’s claim that having kids also reduces mobility isn’t nearly as strong, since there’s no strong evidence that having kids hurts in the search for a new job, whereas there is some evidence now that people are tied to boat-anchor overvalued homes and can’t move to areas with more jobs. However, the big issue here remains the fact that jobs are disappearing too rapidly. No matter what we do, jobs can’t keep evaporating if we hope to maintain a stable society. If jobs keep going away no amount of mobility will help because eventually as the median length of unemployment between jobs gets longer and the median number of jobs per lifetimes continues to skyrocket, at some point you hit a tipping point where people are spending all their time looking for new jobs and essentially no time actually on the job and they become unemployable. You can’t run an economy that way.
A number of economists have suggested that the government needs to step in with a guaranteed employment program, and this is the real solution. A buffer of jobs could be created by the government that rises when unemployment goes up and drops when the economy picks up. People who can’t find work could take the buffer jobs and then they won’t be unemployable, because they’ll have something on their resume. The current system where people are supposed to drop everything, sell their house, haul their family 3000 miles to a new city and disrupt their marriage (and ask their spouse to quit their job) just to get a new job is unworkable.
Turbulence’s claim that Detroit workers are tied to that city by their houses doesn’t fly because housing values have plummeted. No one wants to live in that city, even in the outlying areas, because they’re scared the rot will spread from the abandoned hell-like inner city that’s reverting to wilderness into the exurbs. And who knows, it may, so that’s a sensible fear.
Brachiator’s quibbles about itemized deductions seem silly.
Turbulence is making a very weak argument when he talks about “how irrational people are in believing that a house leads to wealth.” In fact, it does, but typically over a very long time frame. Once you pay off your home, you see the real benefits, and that may take 30 years. The real beneficiary of building wealth through housing is the child of the parents who pay off that mortgage. And not so much because the kid can sell the home and make big bucks, but because it allows the child to live at much lower cost in a home that’s already paid off.
Brachiator is really onto something when he points out that rental properties are the flaw in Turbulence’s argument here. Rental property owners in California have made out like bandits since 1978. They are swimming in loot. Their rental apartment blocks have ridiculously low valuations (if they were bought around 1978) and rental owners get to take depreciation on their properties, which is totally outrageous. In reality, until recently, rental properties appreciated massively. But our corrupt tax laws let apartment building owners write off part of the value of the building in depreciation and take a tax break for it, which is totally unfair.
I think this is where Kain has a really good point but no one seems to have realized it. We need to massively reform the tax laws governing rental properties. Rentier landlords are ripping off the poor and middle class to a grotesque extent with the current tax laws — landlords get to write off expenses, they get depreciation, in states like CA they get outrageous special coddling in the form of a property tax cap…and yet landlords mercilessly gouge their tenants, extracting ever-increasing amounts of wealth.
This is one place where Turbulence makes some really good points too. We need to do something to fix these problems in the tax code as they apply to wealthy assholes who own big mansions or expensive rental properties. The tax code right now is heavily skewed toward making rich rentier landlords richer while hammering renters and poor people. The problem is that the middle class likes the current system because they get thrown a bone in the form of the home mortgage deduction, but the real beneficiaries of the current tax system are the landlords and mansion owners, especially the landlords who own a dozen apartment buildings plus 3 mansions and 4 vacation homes. Where Turbulence goes wrong is in proposing to cut the mortgage deduction wholesale, instead of modifying it to deal with landlords and rich people.
In addition to fixing these grossly outrageous loopholes in the landlord’s taxes, we should also think seriously about putting in an excess profits tax for landlords who gouge their tenants. Some creep who bought an apartment block in California in 1977 and still pays property tax on an assessed value of $120,000 for apartments worth 3 million in today’s market but who charges tenants $1500 a month each for studio apartments should get raped by the tax man with an excess profits tax. Paying $300 a year tax on a 3 million dollar apartment building but raking in $20,000 a month in rents is just crass profiteering. Our tax system should detect that kind of behavior and dun a landlord who does it, because he can damn sure afford it. That kind of crass profiteering doesn’t benefit society in any conceivable way so we ought to try to use the tax code to reduce that kind of exploitive socially worthless landlord greed.
Xenos
@Tim Connor:
I remember people talking about this around 2004, when to say such things was considered really antisocial. Even now, having been prematurely anti-housing is not looked upon with favor.
I had CNN on yesterday, and a panel of experts agreed that nobody saw the crash coming, or ever could have seen it coming. The mind boggles.
Xenos
@mclaren: Where do you find these rich rentier landlords making a killing, grinding the faces of the poor into the dust? There may still be some profitable areas of slumlording in certain cities, but for much of the country rents are going down while property taxes, financial costs, and insurance are going up.
The most trenchant complaints against the tax code aiding absentee-landlords were fixed back in 1987. It caused a bit of a commercial real estate collapse at the time.
bob h
This curve is probably tracks closely the inverse of mortgage rates during this periods. The problem is that they can’t really go much lower.
chopper
@suzanne:
rammed earth is some awesome shit. you can get rammed earth blocks made either professionally or by renting crazy machines to make them yourself if you really want.
Mark
Two thoughts missing from this post….
1. Somebody has to own the houses that you rent.
2. A mortgage is like rent, only you get some if it back someday.
les
@MattR:
Thank you, thank you. It’s fine to argue about what form of housing ownership is “best” for society in the long run. The notion that the owner of a single family home is in some kind of more tax-favored deal than the owner of multi-family/rental property is not part of the argument, because it is, how you say, bullshit.