The wrong kind of falling homeownership

By Felix Salmon
June 11, 2010
he says that we've already had a "great homeownership reset", based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you'll find that "US homeownership is already lower than you think" -- just 61.6%.

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Richard Florida has long been in the same camp as me on the homeownership front: it’s too high, and creates problems like labor immobility and rental ghettoes populated only by people who can’t afford to buy. Today he says that we’ve already had a “great homeownership reset”, based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you’ll find that “US homeownership is already lower than you think” — just 61.6%.

But the problem is that this is exactly the kind of reduction in homeownership that we don’t want. Homeownership isn’t all bad: there are upsides to it, as the authors of the paper explain.

Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.”

It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership. But it’s undeniable that when homeowners go underwater on their mortgages, a lot of these upsides disappear: you’re not going to invest in your house if the return on that investment accrues to your lender rather than yourself.

At the same time, the downside of homeownership hardly goes away the minute you go underwater on your mortgage — to the contrary, it’s exacerbated. The serious problems associated with those crumbling exurbs get much worse with each extra underwater homeowner: now, alongside the rental ghettoes, we have to deal with foreclosure ghettoes as well. If you’re living in a home with negative equity, then you have all the downside of renting, (not being willing to invest in your house, for instance) alongside all the downside of owning (like not being able to easily move to where jobs are).

Tracy Alloway, blogging the Fed report, explains why homeownership is very likely to fall over the next five years: those underwater homeowners would have to save an extra $1,222 a month, on average, if they’re going to close out their existing negative equity and buy a new home in five years’ time. And that’s not going to happen. As a result, we face essentially two choices: either the misery of America’s millions of underwater homeowners is likely to continue for the foreseeable future, or else the walking-away trend will continue to rise, and we’ll have another fully-fledged solvency crisis in the US financial system.

When the NY Fed starts talking about the effective homeownership rate falling, then, there isn’t much in the way of a silver lining, even for those of us who want to see the homeownership rate fall. All we’re really talking about is the personal insolvency rate rising. And that does no one any good.


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One big upside on the owning side of the ledger is that marital stability is much higher for owners (even, and perhaps especially during, recessions). Presumably this extends to stability for children. This goes beyond socioeconomic status, age and education and is major independent factor in whether marriages will remain intact.

Posted by DanHess | Report as abusive

There are a lot of upsides to home ownership, in theory. In practice, like the economy itself, the phenomenon of home ownership has been evacuated of most of its meaning and placed under siege as to its practicability by forces largely beyond the control of key participants, would-be and actual home owners alike.

Control over these forces lies in sophisticated hands on the other side of the equation, commonly known as banking & finance experts, whose influence over people’s prospects of earning a livelihood in order, perchance, to own homes is likewise pregnant with impact. People’s lives have been turned into business by sophisticated businesspeople, without regard for the utter lack of experience most people have of (ever) running a business. There ain’t no positive externality any more, it went thataway.

Replacing the nostalgic ideal of finding jobs that come with a retainable modicum of self-respect is the flawed trickle-down concept of employee entrepreneurship meaning, for the sins and lack of viability of an employer, the employees may be expected to suffer and pay. For the sins of lenders, now borrowers are expected to suffer and pay, even for accommodation that was designed never to become theirs on any attainable terms. Lenders are the ones who established the fictitious asset value of the loan objects, and the terms by which to make them too often – at best – tenuously affordable.

There’s no identifiable morality or sense of community values behind all this. It’s only business. In business, those that can’t afford the price of staying in the game must cash out. There’s no sorry about it. It just is. Sauce for the goose, etc.

And that’s the point at which I say “we” won’t have another fully-fledged solvency crisis in the US financial system. The financial system will have a fully-fledged solvency crisis all of its own. They (sophisticated as ever any Goldman counterparty) issued the note. Banks had this coming. If they so badly want to stay in the pumped-up housing business, let them live in it. Let them see how that feels.

Maybe it’ll bring them down. It’s what happens to people who can’t afford places they’ve tried to live in. Since in America corporations are people too, it’s only fitting that they should bear their fair share of that experience, on their own.

Posted by HBC | Report as abusive

Whoa… from witty to extremely profound HBC.

Posted by hsvkitty | Report as abusive

“like not being able to easily move to where jobs are”

Yeah, it’s tough pickin’ up and moving to southeast asia or the Indian subcontinent when you’re tied down to a house in America.

Posted by carpingdemon | Report as abusive

DanHess, that deduction regarding marital stability is a hen egg problem:

Failed attempts to achieve home ownership regularly breaks relationships and marriages as well as failed couples are more likely to have to move to rent while they put their finances in order and restore the shreds of their lives.

Being able to stay in your house has a positive effect on marriages, just as failing to maintain your social position will have a negative one.

Posted by Finster | Report as abusive

DanHess, from recollection that was one of the reasons FDR pushed home ownership. People with property tend to be less radical because they have more to lose.

HBC, you’ve managed to squeeze bankers are wankers into a whole 6 paragraphs of gibberish. The fact is that without the sub-prime lending bubble NONE of these people would be homeowners and a lot of them still are. Also ignores the fact that the banks were mostly the VICTIMS of fraud not the perpetrators in the lending. But hey since when did facts matter?

Posted by Danny_Black | Report as abusive

This article repeats the error in the article it quotes. ‘Ownership’ is not 61.6% – the real owner here is whoever put up the actual money to purchase the house. Until you at least start to pay them back, you are really just a tenant – then a part owner – finally a real owner. When you stop paying back your loan, you will quickly find out who the actual owner is when they seize the house, sell it and give you whatever (if any) residual money remains. Real owners can still sell and move if the price differential between housing where they live and where they want to live is acceptable – just the same as always.

Posted by walstir | Report as abusive

While no expert on marital stability I’d say it’s probably a subset of social stability which somebody appears to have traded in to the detriment of all. If that’s what now comes standard with owning a home, people of conscience will probably take even a bad marriage over a mortgage any day.

With homeownership comes responsibility – OK, but with mortgage-related derivative speculation has come the risk of society itself being torn apart for the enrichment of witless guys accumulating and unloading worthless bits of paper. If your house is actually their home, you’d better watch out because they neither know nor care what they’re doing with it.

“Why, thou didst conclude hairy men plain dealers without wit”

The formerly staid business of owning a home appears to have been abducted, date-raped, ritually sacrificed and shot full of holes. It won’t be coming back to work on Monday. Borrowers are insufficiently organized to have brought this about. It’s the lending and collateral remodeling industry which is largely to blame. They wrote the rules that eclipsed common sense principles of finance. Now they want everybody else to pay for their folly.

There’s no shame in walking away from a bad idea, nor sense in coming back unless it has completely changed. In the case of home lending this means national overhaul of the premise on which the industry is based, or pretty soon nobody will be buying in at all.

Posted by HBC | Report as abusive

Another big benefit of homeownership is the opportunity to improve or not improve your home as your budget allows. As any homeowner knows, there is enormous flexibility here. If your present finances are tight, you ride it out and leave your house alone. When that bonus comes in, or that inheritance check from an uncle arrives, you get the roof done or get that addition you had been holding off on. Indeed homeowners can bank wealth in a way that is unavailable to renters.

This is a huge benefit for the elderly. With a home they own clear, and a limited income, they can do only basic repairs or changes and let the home age gracefully with them.

Renters have no discretion on this. If their finances improve and they want residential upgrades, they must move, an enormous task if they have a family. Conversely, if the property owner has plans for upgrades, low income people may be squeezed for things they would be willing to do without.

Posted by DanHess | Report as abusive

DanHess, of this assumes the “upgrade” is voluntary and a large portion of the ongoing costs of running a home are not.

Also for the elderly it will mean a significant portion of their wealth will be tied up in a highly illiquid investment with significant ongoing costs and substantial price risk, opportunity cost and regulatory risk. On the other hand you can’t live in an ETF. It is a matter of balancing risks vs returns and for some reason with housing, people ALWAYS undervalue the risks and overstate the returns.

Posted by Danny_Black | Report as abusive

For those who are handy, the ability to bank you free time in the form of home improvement (tax-free of course) is a big deal. In my ancestral Austria, where tax rates are ridiculous in support of socialism, a high percentage of people build their own homes over a period of years, since their labor is worth so much less in the marketplace after taxes.

@D_B, I have found that many things I have done on my home were discretionary, from the kitchen to bathrooms. New energy efficient windows, attic insulation, an attic fan, ceiling fans, and high efficiency appliances are all examples of investments I made which are each realizing a 10% or greater real return for the lifetime of the investment because of utility savings. In each case, I have been able to see the savings appear. That insulation will be just fine 50 years from now. None of these investments are avilable to renters.

Posted by DanHess | Report as abusive

You make some good points, Dan (Hess, that is, not the hot-head) and funny you should mention Austria where I built a nice house some time ago just down the road from Arnold’s ancestral stomping ground. A few years after I sold it, the new owners added a third floor without the slightest hitch in the structural integrity department. Putting this mildly, its value is now substantial indeed, its owner-occupants at peace with the universe.

I like the idea of home improvement in general, and developed an (I think) interesting procedural model by which even upside-down home owners and bona fide realtors can add value to properties in which they hold legitimate interest. I’m not saying it would rescue the entire housing market but it can only help and FWIW is being adopted overseas.

Obstacles to its being adopted in the United States do not however start and end with the carefree “good enough” approach we see here taken in original construction which severely limits vertical expansion – an alarming number of physically qualifying homes might has well have been built on quicksand when it comes to financing.

Many – and I mean far too many – of the banks and realtors involved have absolutely no interest of any longevity in the objective value of any property whose acquisition they prompted, only in the paper value of the initial deal and, as it relates to the buyer’s end of the deal, no further.

This market has failure built-in. Homes having become financial widgets stand little chance of being improved upon much less happily dwelt in, a circumstance from which nobody – not even lenders – can possibly derive great long-term satisfaction.

And Dan…

Far be it from me to admonish you for holding an opinion, but your casual crack at socialism (because I disagree about its prevalence?) prompts me to point out that whatever its potential downside, socialism never did anything like MBS rackets to wreck an otherwise sound-ish economy. Not yet, anyway.

Posted by HBC | Report as abusive

@HBC – thanks for the acknowledgement. If you built a home to Austrian standards, you a terrific craftsman indeed!

Yes it is painful for those who have seen the construction process in Europe to watch a house go up here. A well built house ought to be able to last for centuries! My uncle who owns a successful roofing company there installs on ordinary homes materials we reserve for million-dollar mansions.

I do worry about socialist spending particularly as it pertains to Europe now. I am saddened because I do love Austria, and I expect a terribly painful outcome throughout Europe in the coming collision of demographic decline and social spending. This is of course an old and widely reported story, but the collision has barely even begun. It is certain that many social promises will have be broken because a diminishing workforce will be unable to support it.

My view is, at least the disasters caused by capitalists tend to be cyclical rather than secular in nature. When governments spend in ways that are unsustainable, there tends not to be correction until the sovereign finances collapse. The USSR ran for 70 years and then experienced total economic collapse along with a collapse of life expectancies. Europe will certainly not fare that badly but I will be surprised if life expectances do not contract at least a little in the severe austerity ahead.

Posted by DanHess | Report as abusive

HBC, I think you’ll find mass murder more in line with socialists… Mao, Castro, Stalin, Pol Pot, Ho Chi Minh etc. Yet to see 25 million die in the US as a result of MBSes.

DanHess, business cycles are part of capitalism.. until you find a way to outlaw stupidity and greed they always will be.

Posted by Danny_Black | Report as abusive

Silly me. For a moment there I actually thought I was dealing with people who can tell the difference between social democracy (socialism, even) and communist dictatorship, not to mention the fine line between white-collar econocide and mass murder. George HW Bush did more damage to America’s political vocabulary than even I’d anticipated. For all that this may have been a lapse on my part, at least the other Dan (Hess, bless ‘im) didn’t completely miss the boat.

And now to this.

Given that bipartisan budgetary priorities are set to continually rewarding sophisticated issuers of massive quantities of questionable loans spun into questionable financial instruments. the entire US economy, housing and all, is tracking toward another merciless disaster. It’d take you a million years of earning a million dollars a year and giving it all to the government to shave ten percent off just the recent downside to investment bank handouts.

For sheer soviet-esque disloyalty to free market principle, what already took place between Treasury and banksters was appalling enough, hard to beat in the iniquity stakes. The scope of collateral vandalism and lasting damage to the market is only gradually becoming apparent to all. Go ahead and check out the news at Faint of heart, take note: none of it is uplifting, and no end in sight.

What happens next, as the immense shadow inventory swept under the rug at prior Treasury/bankster love trysts starts looming to the fore, is destined to inflict another >20% injury on home equity values. Homesteaders across the board are looking at decades of relative economic servitude, growing despair and plummeting influence over the asset value of their real estate investment. Despite what both mainstream parties seem to be saying, that can’t be a good thing.

But chin up, sez the optimist in me, no matter how much externality and suspension of disbelief it may take, together we can ride this one out. Look on the bright side. There’ll be exceptions, such as the bulletproof enclaves where “investment” bankers and their political facilitators reside. Funny how their money’s safe as houses. It’s as if bankers were in a union or something.

Frankly, it’s too bad regular humans aren’t quite as united. But they could be.

Posted by HBC | Report as abusive

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