Is home ownership good for the community and society as a whole? There are many varied opinions on this and the implied benefits individuals and families gain from home ownership. There is no denying that purchasing a home is an investment, but just because something is an investment doesn’t mean it is a good investment; it could also be a bad investment. The definition of investment is taking risk with capital with the expectation of earning a profit, such as interest, income, or appreciation in value.
Over time most real estate should appreciate in value, which will cause an investor to gain profit from his purchase. This is typically what people assume when purchasing a home, and that frame of mind is strong in North Carolina where the home ownership rate has been 68 percent over the last five years. Much of what we hear in the media or from government officials encouraging home ownership is unsurprising: "Home ownership is a good investment," "It helps families save more money," and "People who own their own homes are happier." In researching these popular ideas bout home ownership, I ran across an article by the Philadelphia Federal Reserve Bank that addresses many of these common beliefs from an economic standpoint. The article, "American Dream or American Obsession?" points out some interesting facts the media and government don’t cover about the US housing market:
"Over the past 70 years, the U.S. government has devoted significant public resources to encouraging and promoting homeownership."
"The financial crisis that started in 2008 has prompted the government to spend even more on preserving homeownership, despite the fact that the financial crisis itself was led by the meltdown of the U.S. housing market."
"Another argument for homeownership often heard is that housing is a relatively safe asset that pays off in the long run. This argument turns out to be a myth as well."
"Homeownership was positively correlated (in an economic study) with unemployment: that is, the higher a country’s rate of homeownership, the higher its long-term unemployment rate."
The ideas in this article make one re-evaluate the benefits of homeownership. How much does the average homeowner actually save, or does the ability to leverage a home as an asset to acquire more debt lead to less savings? The purchase of a home did make it more difficult for the working class to relocate for jobs, thus aiding in the unemployment problem following the recession — their homes lost value and they were not willing to sell because of the financial loss, even for a new job.
As always, I believe we can learn something from history. In looking at homeownership specific government activity I found that government has been trying to make homeownership easy for Americans since the early 1900s. In 1913 the federal income tax code was created, and with that legislation, the mortgage interest and property tax deductions. In 1934 the National Housing Act created the Federal Housing Administration, insuring mortgages for low and middle-income families that require only a 3 percent down payment. Other agencies have been created since then, such as the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac, and ultimately the government has created a subsidized market that allows people, who would otherwise not be financially able, to purchase a home.
According to this Bloomberg article, the government backed 97% of mortgages in 2009. This demonstrates the extent to which government now interferes with the entire housing market. Government does not need to help people purchase homes. Rather they should stay out of the housing market so people can purchase a home they ACTUALLY can afford. Alas, now tax dollars are being spent on housing counselors through the U.S. Department of Housing and Urban Development.
So the housing issue has come full circle. The government started with a tax code to encourage homeownership, then insurance to allow a lower down payment, and now government sponsored counseling programs to help people get out of the bad investment the government once encouraged. Purchasing a home can be a good or bad investment, but that depends upon the circumstances of the individual purchasing the property. Many variables are to be considered before one should take on the responsibility of a home. Unfortunately the federal government has made homeownership one of its focus areas, which created the housing bubble in the mid-2000s. Hopefully the government will become less involved in the future of homeownership, avoiding the mistakes of the past.
