- Housing is a great long-term investment.
- The homebuyer tax credit makes buying a house more affordable.
- Homeownership is good for society because owners make better citizens.
- It's safe to buy a house with a very low down payment.
- Owning a home is cheaper than renting one because you save on rent.
Wednesday, November 18, 2009
Five myths about homeownership
Joseph Gyourko, chairman of the real estate department and the director of the Zell/Lurie Real Estate Center at the University of Pennsylvania's Wharton School, lists five myths about home ownership:
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Buh bye inventory...it was nice to see you!!!
ReplyDeletehttp://www.recharts.com/nova/nova.html
Some of his arguments are a bit weak, particularly on point 3. He merely points to apparently random countries with higher and lower ownership rates and says "they don't appear better or worse than us". But he doesn't pick any concrete measurement of what "better" would mean, nor does he attempt to address the many differences between the listed nations which would make any direct comparison suspect.
ReplyDeleteIts equivalent to me saying that there's no clear evidence obesity causes hypertension because I know a guy who's fatter than me and thinner than me and they both seem to be in bad health when I look at them.
I'm not opposed to the idea that the claim "Homeownership is good for society because owners make better citizens" is false. I've complained myself that people make the claim with no empirical evidence. But if you want to debunk it, you need to do better than Mr. Gyourko.
oops, that should have said
ReplyDelete"they both seem to be in fine health when I look at them"
The idea that "Homeownership = better citizens" is likely true, but it is probably more coincidental than causational.
ReplyDeleteFor example, renters are probably more likely to be young and the young can be pretty irresponsible (I harken back to the keggers I had at my first rental).
Also, renters are more likely to be poorer/less educated, and its reasonable to assume the poorer/less educated (i.e. trailer trash) arent the best citizenry.
But thats just coincidental factors - take the young or the poor/less educated and make them owners of a posh McMansion in Mclean, they are still likely to junk the place up.
Likewise, the readers of this blog are likely a bit older and more educated, meaning we are no more likely to junk up our living conditions and be irresponsible citizens whether we own the place or not.
I think the factors are more complicated than the author admits. For example, he refers to homes appreciating 1% per year (inflation adjusted?). But, he doesn't mention how home ownership is extremely leveraged (1:10 to 1:20). Where else can you employ that kind of margin on an investment?
ReplyDeleteOf course, the owner has to pay interest on that borrowed money. But, that interest is tax deductible. And, the owner was going to have to spend roughly equivalent dollars on rent. By spending them on a home they at least gain a highly-leveraged benefit.
To me, it's easy for a 50-year-old to say stocks out-perform real estate, so everyone should rent, and put their long-term dollars in Wall St. But, how many 20-year-olds are capable of doing that.
I think home ownership creates a disciplined savings program that wouldn't otherwise exist.
And, there's always the potential to live rent-free after paying off your mortgage. I know someone who lost his job 9 months ago. He didn't sweat it. He relaxed and enjoyed his time off, waiting for the economy to improve. No mortgage or car payment.
The article doesn't mention the benefit of that end goal.
As William James says, people for the most part formulate their arguments to support their preconceived conclusions. I.e., most arguments are attempts to justify desired truths.
ReplyDeleteIn the case of homeowership, most people have the desire to have a place to call their own where they can do what they want to it and not answer to a landlord. Its a luxury/lifestyle desire. Perhaps also a desire for a feeling of independence. In other words, people are mainly interested in the psychological benefits that homeowership can provide.
I am quite certain that none of the five arguments identified in the article have gotten many people initially interested in buying a house. Rather, people decide to buy a house for the psychological reasons explained above, and they use these arguments as post hoc justifications for their decisions.
Khaner and Mark F correctly point out some weaknesses and omissions in the article's content. Nevertheless, I believe that the article is still valuable to the extent that it shows the speciousness of the five arguments and that none of them constitutes a great reason to buy a house (at least right now).
I have no trouble with someone deciding that he will buy rather than rent. However, admit that it is for psychological, lifestyle, and "nesting" reasons rather than for economic ones.
kahner said...
ReplyDeleteHe merely points to apparently random countries with higher and lower ownership rates and says "they don't appear better or worse than us". But he doesn't pick any concrete measurement of what "better" would mean, nor does he attempt to address the many differences between the listed nations which would make any direct comparison suspect.
I have to take Prof. Gyourko's side on this one. The burden of proof is on the people who assert that homeownership is good for society. You complain about his lack of a metric, but he's using the same nonexistent metric that those who make the claim use.
If I want to assert that the moon is made of green cheese, the burden of proof is not on you to prove me wrong, with a working assumption that my claim is true until you do. Nor should we assume that there is an equal probability that either you or I are right. Instead, the burden of proof lies on me to demonstrate that it actually is made of green cheese.
Prof. Gyourko is not claiming that homeownership is bad for society. Instead he's simply pointing out that U.S. law is based upon a working assumption that homeownership is good for society despite the lack of evidence. His exact words are "there's no overwhelming evidence that higher homeownership rates make for better societies". He then provides cross-country evidence that would debunk the "homeownership is good for society" claim.
Those who claim that homeownership is good for society are probably just looking at a correlation between wealth and homeownership. But then one must then ask, are people wealthier because they own homes or do they own homes because they are wealthier? This is where cross-country evidence becomes important.
Anonymous said...
ReplyDelete>>>But that's just coincidental factors - take the young or the poor/less educated and make them owners of a posh McMansion in Mclean, they are still likely to junk the place up.<<<
I agree. Back in late 2005 a couple of NASCAR fans (brothers) bought a house for $205k across the street from me, well into the "bubble."
These guys were pieces of work. Almost nightly domestic disturbances after copious quantities of alcohol, ending in sobbing "hey man, I love you man."
Frequent girl fights, when one girlfriend would catch her man with another girl at 3AM.
These guys would get out of their work truck and drop McDonalds trash (and aluminum cans) in the street. They'd just leave it there.
They walked away early 2008 when the price of the house might have dropped to $260k from a high of $300k a year earlier. It went foreclosure and sold for $227k mid 2008. (It's now estimated on Zillow for $199k).
I assume they had sucked equity out of the house, and even though it was worth $50k more than they bought it for, they were upside down.
I was glad to see them go. A young professional couple with a child bought the foreclosure. They're upside down now.
James, I agree that the burden of proof should be on those who assert homeownership is of intrinsic social value. But my point is only that if one writes an article to debunk the assertion in a major newspaper I expect more substance to the refutation. Otherwise its not worth writing at all. In a related example, to those who continue to claim Obama is not a citizen I might merely say "you have no evidence to support this claim". But if I were to write a newspapaer article refuting the claim, I'd go much deeper. Anyone can say "the burden of proof is on whomever", but its not news or even informational.
ReplyDeleteMark F said...
ReplyDelete"I think the factors are more complicated than the author admits. For example, he refers to homes appreciating 1% per year (inflation adjusted?). But, he doesn't mention how home ownership is extremely leveraged (1:10 to 1:20). Where else can you employ that kind of margin on an investment?
Of course, the owner has to pay interest on that borrowed money. But, that interest is tax deductible. And, the owner was going to have to spend roughly equivalent dollars on rent. By spending them on a home they at least gain a highly-leveraged benefit."
This is the main area where I disagree with Prof. Gyourko. Landlords don't become landlords out of charity. They become landlords because it is profitable (assuming they buy at a reasonable price). When someone buys their own home, they become their own landlord.
Here's where it gets tricky. I disagree with Mark F that most people would "spend roughly equivalent dollars on rent". When people buy, they usually get something bigger and more expensive than what they were renting. That "bigger-ness" is an expense,* not a financially savvy investment.
While the forced savings argument may be good for spendthrifts, for someone like me who is naturally frugal it provides no benefit.
* Because the return on investment is below the cost of borrowing.
kahner said...
ReplyDeleteIn a related example, to those who continue to claim Obama is not a citizen I might merely say "you have no evidence to support this claim".
Actually, I'd argue that the burden of proof is on people who claim citizenship. How do I prove that I am a resident of Virginia? I show someone my driver's license or my actual residence. How do I prove my U.S. citizenship? Through my birth certificate or passport.
The problem with the Birthers is that they refuse to accept any evidence. President Obama has provided his birth certificate and HIS MOTHER IS A U.S. CITIZEN!
I will point out that the original Birthers were Democrats who disputed John McCain's natural-born citizenship, since he had been born in the Panama Canal Zone. Again, his parents were U.S. citizens. I'd hate to think that a U.S. citizen who has a child while outside the U.S. somehow prevents that child from ever becoming president.
James said...
ReplyDelete>>>I will point out that the original Birthers were Democrats who disputed John McCain's natural-born citizenship ...<<<
It goes further back than that. In Presidential campaigns the same argument was raised against Barry Goldwater (1964) born in the Arizona territory, and George Romney (1968), born in Mexico.
The question has never been resolved by the Court.
Personally, the Obama question didn't seem as strong as these (however weak they should be). He had a birth certificate showing he was born in the US, two years after Hawaii became a state.
The thing that was irritating about the Birthers was that they used a tape-recorded telephone call where a pastor had Barack's grandmother say Barack was born in Kenya, and she was present at the birth. The tape they circulated was cut off at that point, having proven all they needed to prove.
However, the rest of the tape had her correcting herself, saying he was born in Hawaii. Throughout the tape, the pastor confused her with terms "your son" and "your grandson." Both of whom are named Barack.
Giving her the benefit of the doubt, it sounded like she believed the pastor was asking about her son. The rest of the tape (omitted by the Birthers) had the pastor emphasizing "grandson" and she repeatedly replied that he was born in Hawaii.
I don't mind suspicious people. But, cutting off a tape because it doesn't support your position is pretty bad. It discredits legitimate suspicions.
yes, his citizenship had already been shown, hence the burden of proof is on birthers to show that the documents are illegitimate. I assume that all presidential candidates are required at some point to submit standard documents and are subject to various investigation by the FBI or someone. I don't refer to anyone who originally sought proof of citizenship for McCain or Obama as a "birther", only those who continue to claim he's not a US citizen after the standard evidence was shown. But in any canse, that's is not but the point of the comment. Its that if you plan to write an article debunking a "myth" (such as Obama being a Kenyan), then do some research and debunk it. Don't just say something to the effect of "there's no overwhelming evidence" of it. Its lazy and pointless. I agree that there's no overwhelming evidence that I've ever heard. But the point of an article isn't to repeat the obvious, or at least shouldn't be. Otherwise why write or read it?
ReplyDeleteHere is a question that hasn't been asked yet-
ReplyDeleteWhy didn't the Washington Post print this article back in 2004 or 2005?
Were they afraid it would hurt their advertising revenue or offend the real estate 'geniuses' out there?
"I was glad to see them go. A young professional couple with a child bought the foreclosure. They're upside down now."
ReplyDeleteHey go over and tell them "inventory is low". Im sure it will make them feel better. LOL
Anyone who buys a home now is certainly a dummy. Artifically low interest rates as a result of the Federal Reserve purchasing mortgage-backed securities will spike once their buying spree comes to an end--March 2010. Why anyone would purchase an overpriced home in this environment is beyond comprehension. It's like throwing money out the window. So many people are buying into old adages that are just not true anymore. When banks are paying people who occupy homes to leave foreclosed properties, and the government is leasing houses back to delinquent borrowers, it sums up the mess this asset class is in.
ReplyDelete> Anyone who buys a home now is certainly a dummy.
ReplyDeleteA bit broad a comment I believe.
Not everyone buys a home to make money or watch it go up in value *every* year. Any car you buy is guaranteed to go down in value, but people still buy them even when public transportation is an option. Why is that?
Perhaps they get some utility out of it. They enjoy owning it and getting other things out of it than just looking at their net worth every day (see psychological comments above).
And even if it is an investment, true "investments" go up and down in price, not just up every single year. Can you say for certain housing will be cheaper five years from now? Or that interest rates will be as low?
If you look at your house as some sort of short-term investment and know what the bond market is going to do, then okay, wait. But people have lots of reasons for buying housing, and being able to buy something different for 10% less in six months just isn't a factor for some people.
"They enjoy owning it"
ReplyDeleteExplain to me the above statement. What do they enjoy? Telling there family and friends they own the home? Certainly an expensive pat on the back. Paying for the maintenance and taxes? Mowing the lawn on the weekends or shoveling snow at 30 degrees?
There is something to be said about renting. The "peace" of mind associated with simply making a payment each month and then forgetting about everyhting else is invaluable. Homeowners worry about mortgage payments and so much more. Unlike a renter, a homeowner is watching that home price meter and all of the other hassles with owning a home. The renter could care less. If you can dismiss the idea of attaining the American dream is home ownership, you life would be much more rewarding.
ReplyDeleteNot sure I completely agree with Mr. Gyourko, specifically on the homebuyer tax credit myth. While it is technically not "cheaper" to purchase a home, the tax credit offers first time buyers a nice chunk of change. So while it's not a less amount to purchase, there is incentive.
ReplyDelete"There is something to be said about renting. The "peace" of mind associated with simply making a payment each month and then forgetting about everyhting else is invaluable."
ReplyDeleteSo then why are you here - why not just rent forever?
Peace of mind for renting? I went from homeowner (marriage number 1 in my 20s) to renting to homeowner (marriage number 2 in my 30s) to renting.
ReplyDeleteI am about to buy again (solo this time). So I have done both over the course of my lifetime.
Renting has plusses and minuses, as does home ownership. The key thing to ownership, which I look forward to again in 30 days, is that I can DO stuff to my property. I can improve it to fit my tastes, wants and desires. I can't do that now with my rental - it is what it is and I can't, and wouldn't want to, spend the money to change anything about it.
Why do we make money? To put into a bank account and look at the big number? Or to use it to change our environment to suit our needs?
If having a big number on a piece of paper makes you feel good, then by all means rent. For me it is about using the fruits of my labor to actually change what is around me, which give me more "peace of mind" than just giving a landlord a check every month and not having control.
Simon Landau said...
ReplyDelete"Not sure I completely agree with Mr. Gyourko, specifically on the homebuyer tax credit myth. While it is technically not "cheaper" to purchase a home, the tax credit offers first time buyers a nice chunk of change. So while it's not a less amount to purchase, there is incentive."
You obviously don't understand Prof. Gyourko's point. The benefit to the home buyer is not $8,000. Instead, as economics teaches, the $8,000 benefit is split between the home buyer and the home seller, because the credit gives sellers less incentive to drop their prices. In places where inventory is high, most of the benefit will go to the buyer. In places where the inventory is low, like the D.C. area, most of the benefit will go to the seller, not the buyer.
For example, if the home seller feels less pressure to lower his price because of the tax credit, the house may sell for $7,000 more than it would have without the credit. This means the buyer only saves $1,000, rather than the $8,000 he thinks he's saving.
As a renter I move my furniture every now and then. That's about as much change I need in residence. I am not a homebody so all of this home is my castle nonsense is not very appealing to me. And by the way, I am flushed with cash.
ReplyDeleteSo again - why are you here on a site with the rest of us renters who want to be homeowners someday?
ReplyDelete"So again - why are you here on a site with the rest of us renters who want to be homeowners someday?"
ReplyDeleteSo that maybe, just maybe, I could make you look at things a litte more differently than what has been embedded in your mind by mommy and daddy.
From Gyuoroko: "what you spend (including your mortgage payment) comes very close to what you would have spent if you rented"
ReplyDeleteBut the thing is, one way or another you have to pay for a place to live, right?
You're not going to have BOTH the money for rent AND an amount equal to your house payment, to invest.
It's EITHER pay a house note OR pay rent, not both.
So when they say you could do better by renting and investing, that's not right because you are losing your rent money and with a house payment you are investing your rent money, maybe not at a great rate but still better than completely throwing it away to the landlord for HIM to payoff his property.
I agree you do have peace of mind renting, you can move easier if you need to for a job and if a hurricane blows away the building it's not your loss.
"So again - why are you here on a site with the rest of us renters who want to be homeowners someday?"
ReplyDeleteSo that maybe, just maybe, I could make you look at things a litte more differently than what has been embedded in your mind by mommy and daddy.
Your life must be chock full of exciting events and loving relations indeed!
Kudos!
"So that maybe, just maybe, I could make you look at things a litte more differently than what has been embedded in your mind by mommy and daddy."
ReplyDeleteHas there ever been a sadder statement uttered? Spending ones time on the blogs trying to convince anonymous people you have never met to do something that affects you in the least. Wow...
"I agree you do have peace of mind renting, you can move easier if you need to for a job and if a hurricane blows away the building it's not your loss.
ReplyDelete"
To be honest, I have found just as much peice of mind about being an owner as I did renting.
As a renter, if I had to brake my lease I would be responsable for that breach. In my old lease, if I broke it I would owe the remander of the rent until the lease expired or until someone else moves in. As a renter I had little control over how much my monthly payments were going to be every year. Basically when my rent went up, I was normally given 2 options. (1) spend a lot of time and money to move (2) Pay more money every month. In the 5 years of renting my rent went from $1200 a month to $1950 a month. As an owner, my mortgage will stay the same unless I refinance. Although my taxes can may up, increases, increases are normally created by an increase in home value which is not a bad thing as far as I am aware of. The one downside as an owner is that if something brakes, I have to pay to fix it. With that said, as an owner I am not stuck with the low end crap that most appartments come standard with.
My apartment has the same "crap" new homes come with, e.g., granite countertops, stainless appliances and the other "posh" ameneties.
ReplyDelete"The one downside as an owner is that if something brakes [breaks], I have to pay to fix it." Actually, there are many more downsides in addition to the time and aggravation in "fixing it". Obviously, you question your home purchase decision or why else would you be on here. I, on the other hand, have the invaluable "peace of mind" you have given up. Enjoy the repairs!
I like moving as well. In the past 10 years I have lived in...
ReplyDeletePhilly PA, Rockville MD, Miami FL, LA CA, Nagoya Japan.
I almost bought in Florida back in 2004, glad I didnt make that mistake. Instead I moved to Japan for a year and had a great time before settling here in Rockville. No way I would buy knowing that prices have shot up 8 times their normal prices.
"Obviously, you question your home purchase decision or why else would you be on here. "
ReplyDelete-Anonymous
That's a silly statement on its face. The fact someone reads this blog doesn't indicate any such thing. Perhaps this person reads the blog because they're interested in finance and real estate markets for purely intellectual reasons. Or because they like reading the renters bitch about how housing has to fall in DC eventually. Does the fact that you read this blog mean its obvious you quetion your decision to rent?
Its strange to me how important it is on this blog for many posters who rent and or who own to prove how "right" and smart they are because they decided to buy or not buy a house.
"Obviously, you question your home purchase decision or why else would you be on here"
ReplyDeleteI have been on here well before I purchased my home. I have been following patrick.net for over 5 years. I am on here because I love reading and talking about the economy.
Unfortunatly in a good area of arlington getting an appartment with all of the amenities was not worth the cost. I was paying $300 more a month for a 1 bedroom just because it had a TINY washer and dryer. I actually considered moving in to a newer place until I learned that getting anything that was less then 20 years old with atleast 1200sqf would cost me around $3000. I was actually at one point considering putting a contract on a lofted 1 bedroom appartment that was $4000 a month just to be in something that was not built 50 years ago or had very limited space. One bad thing about Arlington is that 2/3 of the appartments look like they should be subsidized housing and most of the rest are very expensive or are tiny.
This is why I ended up buying a home. Yes, my mort+pmi+HOA+ taxes come to about $3000. With $3000 a month payment I was able to get almost 2500sq feet, a jetted hot tub, and 3.5 baths, a privite gerage 2 car all within walking distence from the place I was renting from. I found that to be a better deal considering it cost $100 a month just to park 1 car at my old appartment.
"my mort+pmi+HOA+ taxes come to about $3000."
ReplyDeleteYou left out maintenance, insurance and other incidental costs. Many of Arlington's apartments are indeed old. However, $3k a month is a lot of dinero. Hopefully you made your purcahse before 2000 because equity is an elusive concept right now. Unfortunately you have bought into the home ownership society advocated by our former president.
Wow, I'm not from Arlington and these stories of prices chill my heart--both the rental costs and the purchase costs. All I can say is you all must make huge amounts of money to afford paying that (rent or mortgage!)
ReplyDeleteAs someone struggling with decisions (when to sell, and whether to rent when I sell or buy something else) this blog is very, very helpful and informative.
Thanks to you all for helping me as I try to make these major decisions.
My insurance is actually only about $15 more a month than what it was when I was renting. Maintenence has not been that expensive because the HOA fees take care of all exterior work. My expenses so have been related to getting $200 a year checks on my fenace and HVAC which are optional but a good thing to get done and a $100 repair on my gerage door openner. If I wanted to I can spend about $120 more a month to get one of those all inclusive warrenty/maintence plans that covers the HVAC and all major appliences, but I personally don't think its worth the extra money.
ReplyDeleteHow is equity more of an "elusive" concept? A home is worth what someone is willing to pay for it and equity is the difference between what you can sell the home for VS what you owe on the home. It does not seem any more or less strait forward today than it did 10years ago.
IMHO the main probem with looking at 1% above inflation appreciation and concluding that owning one's own home is a bad investment is that it ignores the dividend that you get: housing. And in normal times* the equivalant rent that you would be paying goes up every year, and your principal and interest DOES NOT. The fact that the government subsidies have created the ammortizing 30 year fixed mortgage mean that for a given price/rent ratio and a given rate of inflation in rents, there is usually a number of years where you come out ahead if you purchase. This is not saying tha buying is always a good idea, or that renting is. Usually it depends upon how long you anticipate living at that address. _Jim A.
ReplyDeleteTo the anonymous writer of "My insurance is actually only about $15 more a month than what it was when I was renting. Maintenence has not been that expensive because the HOA fees take care of all exterior work. My expenses so have been related to getting $200 a year checks on my fenace and HVAC which are optional but a good thing to get done and a $100 repair on my gerage door openner. If I wanted to I can spend about $120 more a month to get one of those all inclusive warrenty/maintence plans that covers the HVAC and all major appliences, but I personally don't think its worth the extra money": don't forget to factor in future assessments by your HOA. The sad fact is that HOA reserve accounts, even for well established HOA, never seem to be able to cover big ticket item repairs.
ReplyDeleteIn our society, the real estate agent's industry group has done an effective job making us believe (apparently, wrongly) that renting is a waste of money, when, in reality, it a better approach to accumulate savings. Whenever I hear someone say something like "now that I own a house, I can start building equity", I ask them why building equity is important. No one is able to articulate an answer to that question; instead, it is just one of those things that we've been told is important, with an explanation why it is important. Equity is only a forced savings programs, which, according to the professor's research, is not the most efficient way to accumulate savings.