...a home financed by a mortgage is not just an asset. It's also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the "low income homeownership boom." She considered a simple question -- "whether or not low-income households benefit from owning a home." Her discoveries are bracing:Megan McArdle comments:
Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.
Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% -- less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.
A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Ms. Reid's counterintuitive discovery was that higher-income households were "twice as likely to move long distance if they're unemployed."
Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won't turn a house into a paying proposition for those with little income to shelter.
Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.
America cherishes a national delusion that homeownership is the secret route to wealth and prosperity. Yes, housing has performed very well over the last few decades, but a lot of that increase stems from a serious of idiosyncratic factors that will not be repeated:
- The rise of the long term amortizing mortgage after World War II, which pegged prices to monthly incomes
- The long fall in nominal interest rates after Paul Volcker got serious about inflation
- The increase in the value of the mortgage income tax deduction
- Ever-rising demand from the baby boomers as they move through their life cycle--a trend that is about to halt, if not reverse
Nonetheless, I still see finance gurus urging everyone to buy a house, ASAP! Homeownership may be a fine idea, but the flexibility of renting has its advantages too; neither solution is right for everyone.
Unfortunately, too many people reflexively think home ownership is a guaranteed pathway to wealth and view rent as throwing away money. The finances just don't always add up that way.
See my previous posts on renting vs. owning.