One point you didn't mention that's important for why owning a house may be a good financial choice even absent the various subsidies is the fact that just consuming an asset you own is inherently tax-privileged vs renting it from someone else. This explains a big part of why people may live in a larger house rather than renting it out and living somewhere smaller. If you own / live in a larger house that would rent for 2k / month and decide to rent it out, downsize, and rent somewhere else for 1.5k / month, you actually may end up worse off by doing so if your tax rate on your rental income would be > 25%. Another reason why we probably don't need more thumbs on the scale further incentivizing homeownership via subsidies.
When people invest into the stock market, it does not really lead to more capital investment. IRL payouts (in the form of dividends and buybacks) vastly exceed the amount of new share issuance, and higher capitalizations will increase the pressure for even more payouts!
In contrast, when people spend money on housing (it's not really an investment if you use it to expand your square meters and lifestyle) it increases aggregate demand, creating direct jobs and demand for construction goods (and more manufacturing investment!).
So any concerns about the political aspects of homeownership need to be balanced with the benefit of increasing demand.
What we need is policies that turn this demand into actual construction activity, and more opportunities for ownership (rather than rental) of apartments.
A house owned by its occupant combines capital, management, and use in one person. This is a much different form of ownership than shares of stock, where "ownership" confers almost no influence over how the capital is used. I can make choices about the houses I own, for instance minimizing environmental impacts or maximizing longevity, that managera with feduciary responsibility for a public company might not be allowed to make.
For most people, moving is a huge pain at best. This creates a significant rigidity in location. Landlords like Mom and I know that this is true, and that we have a financial incentive to minimize costs and maximize rents right up to the threshold of inspiring a tenant to make the sacrifice of moving out.
The tales on this thread of corporate landlords have been eye-opening. If Duluth MN had a corporate property manager that fixed issues timely, gave discounts for inconveniences, and charged reasonable rents, tenants would beat a path to their door.
I think one of the most important things we can do to address the viewing-homeownership-as-an-investment aspect of this is better financial education, specifically better education re: investing in the stock market. It won't address the other things that make homeownership appealing, but I think demystifying the stock market and showing both how easy and how profitable it can be (over time) would show people they have options. To be honest, as a renter who's never bought a home, the whole home-buying process sounds pretty complicated to me, not to mention the down payment. Whereas I can invest in an index fund with a few clicks and the minimum investment is usually far less. However, homeownership is seen as a normal thing everyone aspires to, and investing in the stock market is seen as a complicated thing for rich people. However, when I buy shares of a fund I don't have to consider whether their price will go down if "undesirables" also buy shares of that fund.
The house (or, more accurately, the land under the house) my wife and I purchased many years ago has insanely appreciated. Good for us. But who else has benefited?
A similar return in the stock market would, at least in theory, have been our reward for providing investment capital to create new products, services and jobs. But home (land) appreciation is a zero sum game. The high value of my land (subsidized, as Matt points out), makes it less affordable to new buyers, who need even more subsidies to be able to hop on the merry-go-round. Not quite as bad a Ponzi scheme as crypto or Social Security, but getting there.
I’ll conclude with a shoutout to the concept of replacing all current taxes with a Land Value Tax.
So many people object to any safety net spending all the while taking advantage of the interest expense deduction and the deduction for property taxes and eventually the stepped-up basis when they sell their home. These are tax expenditures just as if they were being paid by the government: https://www.cbpp.org/research/policy-basics-federal-tax-expenditures
This is a great piece, but the next stage is looking at how California's Prop 13 limited property tax increases for existing owners, thereby giving empty nesters (and anyone really) an incentive not to sell but to stay in housing that may no longer be optimal. If there's one reason so much of California's housing stock looks and feels stuck in the 1970s, it's because people have been holding on to property with artificially low assessments (limited by Pro 13) versus their actual property values.
I've thought for a while now that some kind of public investment vehicle is the right way to solve the perverse incentives of treating housing as the primary form of wealth building for the middle class. (I was originally inspired by this article: https://www.peoplespolicyproject.org/projects/social-wealth-fund/.)
I think the main problem is sociological: people view the stock market as unreliable, as shown by the perennial debate between 401k vs. pensions. Of course, this is irrational, because history has shown it's actually the government that can't be trusted to hold onto money for long amounts of time. (Context: I live in Chicago.)
At one point, it was common wisdom among Millennials that housing wasn't an investment, but rather something like jewelry (to use Matt's example): a consumption good that may retain its value. But now the 2008 recession is far enough behind us that people are unlearning this lesson.
I enjoy this take very much, and agree with just about all of it. But for some reason it immediately struck me that of all the policy recommendations MY has made, removing the mortgage deduction and stopping the capital gains exemption for primary dwellings is the least likely change to happen of all his recommendations ever. I think it's more likely that the US would reinstate the draft and go to a lottery system for President than to disincentivize home ownership (compared to now).
I feel the missing element in this discussion is one Henry George. Society has chosen to allow land to be an asset class. That's very much a choice, though, not a law of nature. Even if we undid the various policies and tax laws that favor home ownership, it would still be highly desirable for many/most persons to own their homes.
I think the idea that buying a home gives you a big tax deduction is still a very commonly held belief even among people who should know better based on doing their own taxes.
Sometimes the boomers (yes, guilty as named) live in their home with adult children, who come to catch us as we fall down, take part in the joy of multi-generational co-existence and/or help out with the extraordinarily burdensome property taxes levied on single-family dwellings in some parts of the U.S. of A. Did not scroll down to find if there are others who match this profile, and I preemptively apologize for posting a comment, as opposed to hearting one that some other flounder like me as already posted. So enjoy your energy, Matt, and your consistently thoughtful posts.
Sure they are. You have (among other assets) $250,000 in 10 year treasuries @ 4.315% and 10 years and $250,000 left on your 2.8% mortgage. Should you sell the treasuries to pay off your mortgage?
You’re 70 years old and have $4 million in retirement 70/30 equities and bonds and $250k left @ 2.8% on your condo in Del Boca Vista. Should you sell part of your portfolio to pay off the mortgage?
You could make an argument for “peace of mind” but it doesn’t make sense financially.
Because I’m talking about actual people not what the hypothetical most efficient investing option is. So we aren’t talking about multi million dollar homes here. We are usually talking about Someone either having still having a $300k mortgage or possibly having an extra $400 or $500k in investments.
Except that the vast majority of people actually won’t invest all of that. So the differential is actually much smaller. In fact, often that differential might be zero. Because often what we are talking about is telling someone that’s 50 or 55 not to buy a new home and instead stay in the older smaller home, and pay it off.
Or we are talking about someone doing rent vs buy analysis. Where unless there is just a large differential between renting and buying, then it usually makes sense to buy and pay off that home so you aren’t stuck renting at 65 with little assets. Because again most people are very poor at saving that extra money.
Ah, I thought we were talking about the set of people who subscribe to public policy blogs for fun. You know, the people who are reading and commenting here.
The last section is interesting to me. I Gen X and will likely be an empty nester in a couple of years. We have a 3 bedroom 1500 square foot detached house that was plenty of space when all kids were living here, so maybe more than we may need now. I have thoughts of moving to an apartment where I don't have to do much of anything to maintain it. But, but, but - I love my neighborhood and my neighbors. It is always a risk when you move. You never know who you are going to live next to. This is especially important in a dense neighborhood like mine where you can easily see and hear your neighbors. And both my husband and I have been doing more work from home since the pandemic. It will be nice to take one of the kids' rooms and have an office with an actual door to work in rather than attempting to both work in the kitchen/living room. (Which doesn't really work, so I usually go to the office.) And kids' job outlook, health, etc can be precarious, so it is nice for them to know that there is a space for them here should they need it. This is a long way of saying that I think Matt needs to give more weight to the non-financial factors for empty nesters staying in their homes than he does.
One point you didn't mention that's important for why owning a house may be a good financial choice even absent the various subsidies is the fact that just consuming an asset you own is inherently tax-privileged vs renting it from someone else. This explains a big part of why people may live in a larger house rather than renting it out and living somewhere smaller. If you own / live in a larger house that would rent for 2k / month and decide to rent it out, downsize, and rent somewhere else for 1.5k / month, you actually may end up worse off by doing so if your tax rate on your rental income would be > 25%. Another reason why we probably don't need more thumbs on the scale further incentivizing homeownership via subsidies.
When people invest into the stock market, it does not really lead to more capital investment. IRL payouts (in the form of dividends and buybacks) vastly exceed the amount of new share issuance, and higher capitalizations will increase the pressure for even more payouts!
In contrast, when people spend money on housing (it's not really an investment if you use it to expand your square meters and lifestyle) it increases aggregate demand, creating direct jobs and demand for construction goods (and more manufacturing investment!).
So any concerns about the political aspects of homeownership need to be balanced with the benefit of increasing demand.
What we need is policies that turn this demand into actual construction activity, and more opportunities for ownership (rather than rental) of apartments.
I appreciate this article and disagree with it.
A house owned by its occupant combines capital, management, and use in one person. This is a much different form of ownership than shares of stock, where "ownership" confers almost no influence over how the capital is used. I can make choices about the houses I own, for instance minimizing environmental impacts or maximizing longevity, that managera with feduciary responsibility for a public company might not be allowed to make.
For most people, moving is a huge pain at best. This creates a significant rigidity in location. Landlords like Mom and I know that this is true, and that we have a financial incentive to minimize costs and maximize rents right up to the threshold of inspiring a tenant to make the sacrifice of moving out.
The tales on this thread of corporate landlords have been eye-opening. If Duluth MN had a corporate property manager that fixed issues timely, gave discounts for inconveniences, and charged reasonable rents, tenants would beat a path to their door.
I think one of the most important things we can do to address the viewing-homeownership-as-an-investment aspect of this is better financial education, specifically better education re: investing in the stock market. It won't address the other things that make homeownership appealing, but I think demystifying the stock market and showing both how easy and how profitable it can be (over time) would show people they have options. To be honest, as a renter who's never bought a home, the whole home-buying process sounds pretty complicated to me, not to mention the down payment. Whereas I can invest in an index fund with a few clicks and the minimum investment is usually far less. However, homeownership is seen as a normal thing everyone aspires to, and investing in the stock market is seen as a complicated thing for rich people. However, when I buy shares of a fund I don't have to consider whether their price will go down if "undesirables" also buy shares of that fund.
The house (or, more accurately, the land under the house) my wife and I purchased many years ago has insanely appreciated. Good for us. But who else has benefited?
A similar return in the stock market would, at least in theory, have been our reward for providing investment capital to create new products, services and jobs. But home (land) appreciation is a zero sum game. The high value of my land (subsidized, as Matt points out), makes it less affordable to new buyers, who need even more subsidies to be able to hop on the merry-go-round. Not quite as bad a Ponzi scheme as crypto or Social Security, but getting there.
I’ll conclude with a shoutout to the concept of replacing all current taxes with a Land Value Tax.
So many people object to any safety net spending all the while taking advantage of the interest expense deduction and the deduction for property taxes and eventually the stepped-up basis when they sell their home. These are tax expenditures just as if they were being paid by the government: https://www.cbpp.org/research/policy-basics-federal-tax-expenditures
This is a great piece, but the next stage is looking at how California's Prop 13 limited property tax increases for existing owners, thereby giving empty nesters (and anyone really) an incentive not to sell but to stay in housing that may no longer be optimal. If there's one reason so much of California's housing stock looks and feels stuck in the 1970s, it's because people have been holding on to property with artificially low assessments (limited by Pro 13) versus their actual property values.
I've thought for a while now that some kind of public investment vehicle is the right way to solve the perverse incentives of treating housing as the primary form of wealth building for the middle class. (I was originally inspired by this article: https://www.peoplespolicyproject.org/projects/social-wealth-fund/.)
I think the main problem is sociological: people view the stock market as unreliable, as shown by the perennial debate between 401k vs. pensions. Of course, this is irrational, because history has shown it's actually the government that can't be trusted to hold onto money for long amounts of time. (Context: I live in Chicago.)
At one point, it was common wisdom among Millennials that housing wasn't an investment, but rather something like jewelry (to use Matt's example): a consumption good that may retain its value. But now the 2008 recession is far enough behind us that people are unlearning this lesson.
By far the biggest benefit of homeownership is it solves the principal-agent problem.
I enjoy this take very much, and agree with just about all of it. But for some reason it immediately struck me that of all the policy recommendations MY has made, removing the mortgage deduction and stopping the capital gains exemption for primary dwellings is the least likely change to happen of all his recommendations ever. I think it's more likely that the US would reinstate the draft and go to a lottery system for President than to disincentivize home ownership (compared to now).
As I alluded to in my top level comment, it might be the most divergent topic between economist brain and normie brain in America.
I feel the missing element in this discussion is one Henry George. Society has chosen to allow land to be an asset class. That's very much a choice, though, not a law of nature. Even if we undid the various policies and tax laws that favor home ownership, it would still be highly desirable for many/most persons to own their homes.
And everyone mocked George W. Bush for trying to make the "ownership society" happen.
I think the idea that buying a home gives you a big tax deduction is still a very commonly held belief even among people who should know better based on doing their own taxes.
Sometimes the boomers (yes, guilty as named) live in their home with adult children, who come to catch us as we fall down, take part in the joy of multi-generational co-existence and/or help out with the extraordinarily burdensome property taxes levied on single-family dwellings in some parts of the U.S. of A. Did not scroll down to find if there are others who match this profile, and I preemptively apologize for posting a comment, as opposed to hearting one that some other flounder like me as already posted. So enjoy your energy, Matt, and your consistently thoughtful posts.
Really bad article.
If you retire and don't own a paid off home, you are probably screwed.
As a CPA I had to have some tough conversations with people, that they basically couldn't retire. Or if they did they would be homeless.
People should plan to buy and pay off a home before retirement.
Not primarily as an investment, but as a form of risk management. Think of it as homeless insurance
It’s better to have a paid off home and $500k in an IRA than a mortgage and $5 million in an IRA? I’m not sure I follow.
Those aren't the tradeoffs
Sure they are. You have (among other assets) $250,000 in 10 year treasuries @ 4.315% and 10 years and $250,000 left on your 2.8% mortgage. Should you sell the treasuries to pay off your mortgage?
You’re 70 years old and have $4 million in retirement 70/30 equities and bonds and $250k left @ 2.8% on your condo in Del Boca Vista. Should you sell part of your portfolio to pay off the mortgage?
You could make an argument for “peace of mind” but it doesn’t make sense financially.
Because I’m talking about actual people not what the hypothetical most efficient investing option is. So we aren’t talking about multi million dollar homes here. We are usually talking about Someone either having still having a $300k mortgage or possibly having an extra $400 or $500k in investments.
Except that the vast majority of people actually won’t invest all of that. So the differential is actually much smaller. In fact, often that differential might be zero. Because often what we are talking about is telling someone that’s 50 or 55 not to buy a new home and instead stay in the older smaller home, and pay it off.
Or we are talking about someone doing rent vs buy analysis. Where unless there is just a large differential between renting and buying, then it usually makes sense to buy and pay off that home so you aren’t stuck renting at 65 with little assets. Because again most people are very poor at saving that extra money.
Ah, I thought we were talking about the set of people who subscribe to public policy blogs for fun. You know, the people who are reading and commenting here.
Indeed. We did it for peace of mind and as a guaranteed "safe" investment but I'm aware that the expected financial value was lower.
Exactly
The last section is interesting to me. I Gen X and will likely be an empty nester in a couple of years. We have a 3 bedroom 1500 square foot detached house that was plenty of space when all kids were living here, so maybe more than we may need now. I have thoughts of moving to an apartment where I don't have to do much of anything to maintain it. But, but, but - I love my neighborhood and my neighbors. It is always a risk when you move. You never know who you are going to live next to. This is especially important in a dense neighborhood like mine where you can easily see and hear your neighbors. And both my husband and I have been doing more work from home since the pandemic. It will be nice to take one of the kids' rooms and have an office with an actual door to work in rather than attempting to both work in the kitchen/living room. (Which doesn't really work, so I usually go to the office.) And kids' job outlook, health, etc can be precarious, so it is nice for them to know that there is a space for them here should they need it. This is a long way of saying that I think Matt needs to give more weight to the non-financial factors for empty nesters staying in their homes than he does.
I certainly hear you on the book thing. And I live two blocks from a public library!