A Nation of Homeowners or Renters?

Somebody over at Bloomberg named Karl Marx, excuse me, Karl Smith, thinks America should become a nation of renters. Homeownership made sense, he says, when ownership costs were low relative to rent. But now, due to something he calls “financialization,” homeownership is too expensive, and so we should abandon the American dream of high levels of homeownership.

It may be self-serving for them to say so, but realtors are right to say that homeownership is a key to building wealth. Photo by Chris & Karen Highland.

Apparently, due to fast-rising home prices, private investors such as pension funds are buying homes and then renting them out. Homebuilders are even building homes with plans to rent them instead of selling them.

We’ve heard claims like Smith’s before. After the 2008 financial crisis, a spate of opinion pieces came out suggesting that maybe Americans weren’t smart enough or wealthy enough for most of us to own our own homes. Never mind the fact that housing used to be so affordable that low-income urbanites actually had higher homeownership rates than middle-income urbanites. Never mind the fact that relatively low-income countries such as Brazil and Mexico have significantly higher homeownership rates than the United States.

If Smith thinks that private investors buying homes is making housing expensive, he is naive. The real reason for the high cost of housing in many parts of the country, as Antiplanner readers know well, is that a number of state and local governments have used growth-management policies to make single-family housing expensive in order to force more people to live in multi-family dwellings based on the fallacious notion that the latter is more “sustainable.” Since roughly 85 percent of single-family homes are owned by their occupants while roughly 85 percent of multi-family dwellings are rented, this policy has favored renters over owners.
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Of course, policies that make housing expensive to own also make it expensive to rent. But it’s a lot harder to make a down payment on a home when prices are higher. Federal regulations also discourage lenders from asking people to pay more than 30 percent of their incomes in their mortgages, while no such limits apply to renters. Thus, higher housing prices make it harder to own even if renting is expensive as well. Artificial housing shortages also make prices more volatile, which makes homeownership a riskier investment as well.

I suspect people like Smith imagine that the choice is between buying a 2,000-square-foot single-family home or renting that home. But that’s not the real choice. Instead, the real choice is between a five-bedroom, three-bath, 2,600-square-foot house on a third of an acre lot vs. a one-bedroom, one-bath, 575-square-foot apartment. The monthly mortgage payment on a fifteen-year loan plus the HOA fee on the house roughly equals the monthly rent on the apartment. The house is in San Antonio, which doesn’t practice growth management; the apartment is in San Jose, which does.

Even if renting provided the same home as buying, homeownership has value. Smith claims that it is an illiquid asset, but homeowners can borrow against the equity in their homes while renting means building up someone else’s equity rather than your own. During a period when inflation may become important, homeownership is one of the few inflation-proof investments moderate-income people can make.

Most small businesses get at least some of their initial financing from the equity in the business owners’ homes, so reducing homeownership rates contributes to lower rates of small-business formation. In addition, after adjusting for the incomes and educational attainments of the parents, children of moderate to low-income families do better in school if their families own their own homes than if they rent.

People like Smith who try to justify lower homeownership rates are merely enabling government meddling in housing markets. Such meddling should stop and in particular should stop attempting to favor multi-family housing over single-family homes.