I live in a single-family home that I have owned for more than 35 years. It provided a place for my family to grow and prosper, and it is full of memories that I will cherish for the rest of my life. So I am definitely not against single-family homes. But as I think of the problems this country faces with respect to housing affordability and supply, I wonder whether the single-family home deserves the sacred cow status it has been given. In fact, there are a variety of beliefs about housing that are so ingrained in our American psyche that many people accept them – and act on them – without really thinking about whether they are always true.
These beliefs are so widely held that they have attained almost mythical status, and we have shaped a significant part of our economy and a significant number of our governmental institutions around the assumption that these beliefs are part of the foundation of our society. I try not to get wrapped up in crazy conspiracy theories, but the more I have looked into the housing industry and the beliefs and policies that support that industry, the more I see a dark side that needs to be brought into the light. There is a business constituency that benefits mightily from the current subsidies and housing mythology, and they are loath to give up that advantage regardless of how inefficient or misguided those housing policies might be.
My goal with this post is to question the “myths” that have grown up around housing and homeownership, and suggest changes to housing policies at both the local and national levels in order to better address the affordability and supply challenges that we currently face. Here is my list of the top “myths” that need to be reexamined:
Homeownership is a Great Investment
How many young adults or newly married couples have been advised to buy a house as soon as possible because it is a great investment? Probably millions. This myth is actually the foundation of several other myths so it is the one I will tackle in the greatest detail. The problem with debunking this myth is that buying a home can be a great investment – provided you buy at the beginning of a long period of price appreciation, hold onto the home for a long period of time, and avoid plowing a lot of additional money into the house for repairs or remodeling. For the vast majority of people, buying a home is a mediocre investment decision, and for some an investment debacle. Buying a home should be seen as a lifestyle decision that hopefully brings you joy and utility. If it turns into a good investment, then that is icing on the cake.
Here is what can go wrong:
Not all housing appreciates in value. Yes, housing in general has risen in value faster than the rate of inflation over a long period of time. The problem is that the average hides times and locations where housing has fallen in value or remained stagnant. After the housing bubble burst in 2008, hundreds of thousands of people suddenly owed more for their home than the home was worth – and that remained true for most of a decade in the areas that were hardest hit. In addition, price appreciation often bypasses people who buy homes in undesirable neighborhoods or in small towns that are losing population. Buying at the wrong time or place can be an investment disaster.
Transaction costs are huge. When I buy or sell stocks or bonds there is a transaction cost but it is very small compared with the value of my investment. When you buy or sell a house, however, the transaction costs can easily be 5 to 10 percent of the cost of the home. These costs are sometimes hidden from the buyer because they are rolled into the monthly mortgage payment, but they reduce the return on investment. In fact, a new homeowner typically needs 4 to 8 years of solid price appreciation to recover the transaction costs and return to a break-even position. Need to move sooner than that? Sorry, you lose.
Homeownership is illiquid and indivisible. If I own 500 shares of Apple or Microsoft and experience a short-term cash crunch, I can easily sell some of my holdings to raise money. The asset value of a home, however, is harder to tap in times of need. Yes, it may be possible to do a cash-out refinancing of the mortgage or take out a Home Equity Line of Credit, but those options are not always available, and they take time and have additional transaction costs. In fact, a home is often hardest to sell (or refinance) when the need for money is greatest (e.g. during an economic downturn).
Housing often requires unplanned injections of cash. If I own Apple stock, no one calls me from Cupertino to ask for $1,000 to replace the water heater. The truth is that owning a home – particularly an older home – frequently entails spending a substantial amount of money on the structure of the home itself or on one of the key systems that make the home liveable. These expenses are typically unexpected and thus difficult to budget for. This is particularly problematic for low- or moderate-income households who often have fewer financial resources. A recent survey by the Federal Reserve, for example, revealed that nearly 40 percent of US households could not cover an unexpected $400 expense without borrowing money or selling an asset. [1] Yet failure to come up with the money for an essential repair can undermine both the ability of the home to provide safe shelter and the long-term value of the home as a supposed investment.
Tracking the investment performance of homeownership is difficult. To make wise investment decisions, you need to be able to easily track the performance of each investment. For most traditional investments (e.g. mutual funds, stocks, CDs, etc.), the return on investment can be calculated at just about any point in time with great precision. That is not the case for homeownership. People often buy a house at a certain price, live in the home for 20 or 30 years, sell it at a much higher price and assume that it has been a great investment.
My house, for example, has gone up in value by roughly 425% and has provided my family with a safe and comfortable place to live (which has a value on top of the price appreciation). That seems awesome until you consider that I have owned the house for 37 years, have spent hundreds of thousands of dollars remodeling, repairing and redecorating, and have donated a couple of thousand hours of my labor mowing the grass, repainting the trim, shoveling the driveway, doing miscellaneous repairs, and more. So now what is my real return on investment? It is almost impossible to calculate and the same is true for the vast majority of homeowners. The myth makes us think we are getting a good return on our investment but the reality is completely unknown.
The bottom line is that wealthy people who can buy nicer homes in nicer neighborhoods probably have benefited from housing appreciation, but the results are almost assuredly more mixed for moderate- and low-income populations. Yet the strength of this myth endures and households of all types and income levels continue to make homeownership a key component of their investment portfolio. A recent study found that the 2021 median net worth of all U.S. households – counting all asset types – was $166,900. If home equity is excluded, however, that number falls to $57,900 despite the fact that roughly a third of households don’t even own their home. For people who do own their home, that equity tends to be a disproportionately large share of their total wealth particularly for minority households. For a majority of black and hispanic homeowners, the equity in their home represented two-thirds or more of their total wealth. [2] Touting homeownership as a universally good investment is a serious disservice to those who are most in need of good investment advice.
The Value of Single-Family Homes Needs to be Protected by Government Intervention
One of the side effects of people thinking of their home primarily as an investment and having that home represent a disproportionately large chunk of their wealth is that they become paranoid about protecting that investment. This largely plays out in decisions at the local government level. Despite the fact that throughout history cities have contained a mix of uses in relatively close proximity, we have now convinced millions of homeowners that the value of their home will be undermined by just about any new development type other than more single-family homes. Particularly in suburbia, this has resulted in acre upon acre of single family subdivisions isolated from shops, offices, apartments, retirement facilities and sometimes even churches and schools.
This is partly where the “sacred cow” status of single-family housing has come from. People recognize the fragility of their house as an investment vehicle and so discussions get skewed toward property values of nearby homeowners and away from discussions of what would provide the most utility to the maximum number of people.
Buying a Home Is a Good Investment for Just About Everyone
As I pointed out early on, buying a home can be a good investment under the right circumstances. The problem is that this “sometimes” circumstance gets extrapolated to be general advice applicable to the general population under all circumstances. Here are two examples of groups that should not buy a house:
People living paycheck to paycheck. Recent research by Bank of America showed that about a quarter of all U.S. households spend basically all of their income each month and have little accumulated savings. This makes it difficult to come up with the traditional down payment required for a mortgage, of course, but even if this obstacle can be overcome it would still be a bad idea for this type of household to buy a home. As I pointed out earlier, homeownership entails unexpected expenses that keep the house liveable and maintain its value as an investment asset. Households that can’t come up with the necessary funds whenever those minor emergencies happen are likely to see the value of their home slip quickly away.
People with job instability. A sudden loss of income can force a homeowner to sell when they don’t want to or even lead to foreclosure. Both options are likely to create financial difficulties that could have been avoided. And while anyone can lose their job unexpectedly, there are some households where either voluntary quitting or involuntary layoffs are reasonably predictable. Recent graduates, for example, are the most likely segment of the population to move across the country to a new city. Other people work in industries that are notoriously cyclical and tend to go through periods of both hiring and layoffs. Still others are unsure of their career goals and tend to switch jobs frequently – either voluntarily or involuntarily. Buying a home and then failing to make mortgage payments because of a job disruption is likely to be much worse than missing a rent payment and having to change apartments. In addition, people with job instability are probably best served by being as mobile as possible so that they can take advantage of better job opportunities wherever they might be located.
A Low Down Payment is Fine Because Housing Appreciates in Value Rapidly
Many areas of the country have seen a relatively rapid escalation in housing prices as supply has failed to keep up with demand. This has made it more difficult to come up with the traditional 20 percent down payment on a mortgage. The Federal government has a variety of programs that address this issue by allowing mortgages to be issued with as little as 3 percent down. This makes the loan riskier from the lender’s perspective so typically the borrower is required to pay for private mortgage insurance (PMI) which protects the lender in case of default.PMI can add hundreds of dollars to your monthly mortgage payment which is a significant penalty, but it can often be removed once the home reaches a loan-to-value ratio of 80 percent. Of course, each mortgage payment adds to the homeowner’s equity, but early in a mortgage the vast majority of each payment goes toward interest rather than principal reduction. Five years of mortgage payments might reduce the loan principal by only 10 percent.
Frequent stories in the press of double-digit increases in housing values, however, make some people assume that they can reach the 80 percent LTV in just a couple of years. That may be true in some isolated markets that are extremely hot, but it is not true generally and particularly not true throughout the midwest. To begin with, the average sales price of U.S. homes falls from the previous quarter about a third of the time, and can fall several quarters in a row. In addition, the press tends to cover exceptional cases rather than the more typical situations. Here are the actual rates of price appreciation over the long term for a variety of markets – some hot, and some not so much: [3]
Average Annual Rates of Housing Price Change
20-year average 40-year average
Tampa FL 4.32% 4.94%
Austin TX 6.35% 4.73%
San Jose CA 4.63% 6.01%
Cleveland OH 2.46% 3.50%
Indianapolis IN 3.74% 3.91%
Kansas City MO 3.89% 3.90%
The reality is that no one sees double digit increases for very long, and the midwest in particular has relatively pedestrian rates of housing price increases. This means that borrowers can be stuck paying the PMI penalty for longer than they planned.
The Federal Government Is Doing All It Can to Reduce the Cost of Home Construction
Since the primary housing problems our country is facing are high housing costs and inadequate supply, you would think that the Federal government would have all sorts of programs to encourage innovative ways to reduce construction costs and to encourage local governments to resist the NIMBYs and expand housing opportunities. Although it has tried such programs in the past (with mixed success), there are virtually no major initiatives in this regard currently. In fact, I would argue that it is in the Federal government's best interest for housing construction costs to keep rising despite all the official moaning and weeping about housing affordability.
Two of the Federal government’s primary housing tools – Fannie Mae (FNMA) and Freddie Mac (FHLMC) – would be in a much more precarious position if the cost of new housing fell because that would cause the value of existing housing to fall as well. Fannie and Freddie are in the business of buying mortgages from the originating banks, bundling them into Mortgage Backed Securities (MBS), and selling those securities to investors, all of which allows local banks to keep making loans. If housing values fall, then the all important loan-to-value ratio gets worse for all of the mortgages they have packaged which makes the probability of default go up (especially those 3% down mortgages). This was the essential problem during the 2008 housing default crisis – housing values which everyone assumed would keep rising suddenly started to fall. People who held risky mortgages couldn’t refinance and couldn’t sell at a price that would pay off their mortgage, so they defaulted.
The current situation is not nearly as dire as it was in 2008, but no one at the Federal level really wants housing prices to fall. Arguably, Federal priorities seem more focused on keeping Fannie and Freddie profitable – not to mention the investment bankers making billions off of various forms of housing securities – rather than on finding affordable housing for those in need. Instead, Fannie and Freddie claim to be addressing affordability by lowering down payment requirements so that it is easier for people to get a mortgage. It doesn’t really make anything more affordable, it just expands access to the overpriced home buying market.
The Bottom Line
There are a lot of good reasons to own your own home. Perhaps you are starting a family, or need room for multiple pets, or want a large garden, or like to customize your living environment in unusual ways – these reasons (and more) are a perfectly logical basis for homeownership. They are not, however, sufficient reasons for treating homeownership as some type of sacred cow that is deserving of special protections or subsidies.
Yet the storyline persists that homeownership is worthy of special treatment because it is somehow essential to the American way of life. Homeownership, it is said, makes for more stable communities, higher levels of community commitment, and a more productive economy. But is that really true or have we simply accepted the myth without much critical thought? This might be a situation where we see homeowners being active in the community and reinvesting in their neighborhood, and simply confuse correlation with causation.
It turns out that homeownership rates vary widely among western democracies. Here is a partial list of countries with rates above ours, about the same as ours, and less than ours:
Poland (87%), Norway (79%), Italy (75%), Greece (70%)
USA (66%), UK (65%), Sweden (65%), France (63%)
Denmark (60%), Austria (54%), Germany (48%), Switzerland (42%)
If there is a connection between homeownership, societal stability, or economic productivity I certainly don’t see it. [4]
In 1917, John Harvey Kellogg popularized the phrase “breakfast is the most important meal of the day.” Mr. Kellogg, a prominent member of the cereal industry, didn’t have any real evidence that breakfast was any more important than any other meal and yet this phrase has been repeated so often that it was accepted as common wisdom for decades. Similarly, we have allowed the housing industry to repeat the mantra that owning your own single-family home is an essential part of the American dream so often that it is accepted as true by many people. The result is a system of developers, contractors, realtors, bankers and financiers who are focused on a very narrow segment of the housing market, and a large pool of households who have been convinced that buying into that narrow segment is the key to their happiness. That narrow focus has been extremely profitable for the developers, contractors, realtors, bankers and financiers, but it has, in my opinion, been detrimental to many households and our society in general.
There are two things this country needs to focus on: first, we need to incentivize households to save money in ways that build generational wealth; and second, we need to incentivize the expanded production of safe, energy-efficient housing in more diverse forms and locations than has been produced in recent years. Housing mythology has unnecessarily bundled these two things together, with a particular emphasis on single-family homeownership to the detriment of other forms of housing and other arrangements for paying housing costs.
In many cities, the monthly cost of homeownership is hundreds of dollars more than the cost of renting an equivalent house or apartment. In that situation, renting instead of owning and putting the savings into an IRA or 401(k) account (especially one that is matched by your employer) might be a much smarter financial strategy. This would be particularly true if Federal subsidies for homeownership were dismantled and replaced with incentives for wealth building in any form. For years, the educational establishment has boosted literacy as a key to a better life. Perhaps boosting financial literacy should be a close second.
Notes:
1. Board of Governors of the Federal Reserve System; “Report on the Economic Well-Being of U.S. Households in 2022 - May 2023”; https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-expenses.htm
2. Rakesh Kochhar and Mohamad Moslimani; “The assets households own and the debts they carry”; The Pew Research Center; December 2023; https://www.pewresearch.org/2023/12/04/the-assets-households-own-and-the-debts-they-carry/
3. Federal Reserve Bank of St Louis; “Economic Data: All Transactions House Price Index for Cleveland-Elyria Ohio (MSA)”; August 2024; https://fred.stlouisfed.org/series/ATNHPIUS17460Q
4. Morris Davis; “Questioning Homeownership As A Public Policy Goal”; Cato Institute; May 2012; https://www.cato.org/policy-analysis/questioning-homeownership-public-policy-goal
