In Monday's New York Times, Paul Krugman raises the question whether the United States has gone overboard in promoting home ownership. Krugman points out not only that the bursting of the subprime bubble has also burst the homeownership bubble, but also that homeownership brings risks of excessive leverage (if prices go down some, an equity stake can be totally lost); "stickiness" (making it hard to move when jobs dry up); and the high expense of commuting (when families chase low house prices well beyond where the jobs are).
Krugman got much right, but before we throw homeownership overboard, it's worth pausing a minute to consider both the benefits of homeownership done right and what we need to do to make rental housing a reasonable alternative, both as shelter and as a way to build assets.
When done well-a home that is affordable, financed with a fixed-rate mortgage with taxes and insurance escrowed, and a homeowner who understands the responsibilities of homeownership-homeownership means having a place of one's own for the long term, in which to bring up family without the risk of eviction because the rent suddenly goes up. It's the opportunity to build up equity through the forced savings of a fixed-rate amortizing mortgage and through positive financial leverage. And it means the psychological satisfaction of owning a substantial asset, often for the first time in many generations. Hundreds of non-profit organizations and community development financial institutions across the country have helped hundreds of thousands of Americans do homeownership right, and from all reports, those homeowners are making it through this crisis OK.
So the first point is that we need to do a much better job of doing homeownership right, for many more people. And the ongoing energy challenge means that we need to add energy efficiency, both of the building and of its location, to what we mean by affordable.
But homeownership isn't necessarily the best option for every family at every point in their lives, even when some home, somewhere, would appear to be affordable. For some families, the additional debt burden-frequently on top of heavy student loans-is unsustainable. For those whose job prospects are unstable or likely to require frequent moves, renting enables greater flexibility. For others, the maintenance responsibilities of homeownership may be more than they want or can handle. And finally, especially with high gas prices and energy prices that are likely to stay that way, renting may simply be a better financial deal; rental housing may be closer to jobs or public transit, and heating and air conditioning a unit in a multi-family building is almost always less expensive than sustaining a stand-alone single-family house.
But our previous policy of responding to almost all housing needs by assuming they will be met by ownership cannot simply be abandoned. Instead, we need to accompany our effort to do homeownership right with:
- Quality, affordable, well-located rental housing, which will require a reinvigorated federal housing policy, supported with sufficient funding;
- High quality, well-structured financial systems and products that will help people save and grow their assets without the leverage of homeownership; and
- Respect for the choices people make, and in particular, valuing the role of all of us-renters and owners alike-in the civic life of our communities.