The Myth of Homeownership Wealth Creation
Over the past several decades, politicians in Washington, DC have considered increasing homeownership to be a civic duty. And the reasons seem obvious: It's the American Dream. It's the only way low-income families can build wealth. It's just a good investment every middle-class household should have.
Or so we've been told.
The real story debunks the theory that housing is the best investment for everyone, and it reveals the desire of policymakers to preserve homeownership at all costs is completely backwards.
Government support for homeownership has a long tradition. Fannie Mae and the Federal Housing Administration were started in the 1930s to help low-income families buy homes. The Community Reinvestment Act was passed in the 1970s to promote homeownership in urban areas and for minorities. Congress has even gone so far as to establish homeownership goals that the Housing and Urban Development Department has to implement.
It is easy to see why policymakers have bought into the uncontested belief that homeownership is a good investment. Looking at the Case-Shiller housing price index over time, we can see that prices grew steadily until the 1990s and then took off like a rocket until the bubble burst in 2006.
Prices Mostly Flat
When you adjust these numbers for inflation, however, housing prices stayed nearly flat from the end of World War II until the mid-1990s. Only once the so-called 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act opened the floodgates of federal subsidies, later to be caffeinated by the Federal Reserve's loose monetary policy in the early 2000s, did prices double nationally. Of course, that price jump was a bubble, and prices have fallen nearly back to levels last seen in the 1990s.
By this measure, there really was little national investment gain in housing until excessive subsidies created the housing bubble. This is not to say housing was a bad investment in the last century. In the 50 years following World War II, real housing prices grew 3.53 percent a year. But compared to other possible investments during this period, that is a small growth rate. Consider that during the same period, the Dow Jones stock index grew more than 2,700 percent.
Similarly, the S&P 500 and NASDAQ—which started later in the century—have grown substantially more than housing. Since 1970, the indexes have grown 542 percent and 953 percent, respectively.
Of course, investment gains from housing are not the only measure of wealth. In fact, one feature of homeownership is the forced savings it creates as households build equity through their mortgage payments each year.
However, all of the subsidies—both from GSEs and tax deductions—for homeownership did nothing to improve the average equity position of low- to middle-income households. The percentage of equity that households have their homes has fallen from around 80 percent in the 1950s to 38.5 percent at the end of 2010.
This means that nationally, homeowners are putting less money down on their homes on average, and paying off less of the principal on the mortgages. So not only has the homeownership rate declined from the housing bubble peak, which topped 69 percent in 2005, down to the current 64 percent, but also the amount of "ownership" in homes by residents has been reduced as well.
This is not to say homeownership is a bad thing. And on an individual level, low- and middle-income families certainly were able to build equity during this period—which is a good mechanism for creating wealth. But a lesson from the evolving "foreclosure society" in the wake of the housing bubble is that what many thought was homeownership was simply a twisted form of renting.
If the only means of getting a family in a home is to provide government subsidies that lower interest payments and down payments, then the homeownership is all a façade, and there is no equity growth.
House as Savings
To be sure, homeownership is a worthy and attainable goal, but not before a household has the means. A house is not a stock to be wielded as an investment, but rather it is a savings account that maintains its value with inflation.
Furthermore, evidence has surfaced that owning a home before you are ready is actually detrimental to wealth-building. Beyond the foreclosure crisis and misplaced confidence in interest-only loans, unemployed families that cannot find a job or a buyer for their homes have been unable to move elsewhere in the country where there is work to be found.
All of this is important history for policymakers today to understand, because so many decisions are being made in the interest of homeownership.
Because it is politically difficult, the Congressional debate over housing finance is missing a key point: Without homeowners putting equity into their house, there is no actual wealth-building. And if the government juices prices, there is no investment gain either.
Policymakers must break from conventional wisdom and rethink homeownership when it comes to public policies that ignore fiscal responsibility in pursuit of a failed goal. Homeownership is a good store of value, but not a wealth-creation machine.
Anthony Randazzo (Anthony.email@example.com) is director of economic research at Reason Foundation, where a version of this article first appeared. Used with permission.