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BY WENLI LI AND FANG YANG
H
omeownership is an integral part of the live in housing units they own has
risen from around 40 percent before
American culture. Over the past 70 years, World War II to close to 70 percent
the U.S. government has devoted significant today. The financial crisis that
started in 2008 has prompted the
public resources to encouraging and government to spend even more on
promoting homeownership. The recent financial crisis preserving homeownership, despite
the fact that the financial crisis itself
has prompted the government to spend even more on was led by the meltdown of the U.S.
preserving homeownership, despite the fact that the housing market. In light of these
developments, an increasing number
financial crisis itself was led by the meltdown of the of academicians and media reporters
U.S. housing market. Now, an increasing number of are now questioning the previously
unquestionable: Has the American
academicians and media reporters are questioning the
dream turned into an American
previously unquestionable: Has the American dream obsession?1
In this article, we analyze the
turned into an American obsession? In this article, Wenli
economic benefits and costs associated
Li and Fang Yang analyze the economic benefits and costs with owning one’s residence. We
re-examine a variety of rationales
associated with owning one’s residence. They re-examine
that have been put forward in support
a variety of rationales that have been put forward in of homeownership, namely, housing
support of homeownership and examine the evidence for as a means of saving and a means
A
large variety calculation does not count the cost associated with homeownership,
of government possible taxation of rental income in that is, the reduced mobility rate.
programs have an owner-occupied unit. In a nutshell, while owning one’s
served over the The government also funnels own residence carries economic
years to increase cheap credit into government benefits for many households, it is
homeownership housing agencies, including the not for everyone, at least not on
in the United States. Most of these Federal Home Loan Banks and economic grounds. As the quotes
policies work by reducing the cost of Fannie Mae and Freddie Mac.a These from Lincoln and Roosevelt suggest,
homeownership or by increasing the agencies borrow at preferential rates not all arguments for supporting
flow of capital to the housing market. and were long perceived as backed homeownership are economic in
The oldest and perhaps most by the U.S. Treasury. In July 2008, nature. We do not explore in detail
powerful of these policy tools lies in right before the Federal Housing some of the noneconomic arguments
the federal income tax code formed Finance Agency (FHFA) was formed, that have been offered as reasons
in 1913. Homeowners can deduct Fannie Mae and Freddie Mac held to subsidize homeownership. These
interest on mortgages of up to $1 or guaranteed $5.2 trillion worth of noneconomic benefits are typically
million on their taxes; they can also mortgages, two-fifths of the national termed social benefits. (See The Social
deduct local property taxes. Profits total.b Benefits of Homeownership.)
(capital gains) from house sales are The Federal Housing
also shielded from taxation for up to Administration (FHA) insures HOMEOWNERSHIP
$250,000 ($500,000 for a married mortgages for low- and moderate- AND SAVING
couple filing jointly) if the owner income families that require only a 3 The main economic argument for
used the property as a primary percent down payment. Created by homeownership is that it is the most
residence for two of the five years the National Housing Act of 1934, important way in which the majority
before the date of sale. the FHA insures private mortgage of families accumulate wealth, since
Finally, as Satyajit Chatterjee lenders against borrower default on houses give households a means of
explained in his 1996 Business Review residential real estate loans. These saving as they pay off their mortgages
article, if we lease our housing unit are the borrowers who typically have and increase their home equity.
to another household, our rental no credit history, a history of credit This mechanism effectively forces
income as a landlord would be taxed. problems, or not enough cash to households to save more than they
However, if we own the house we live cover the down payment and closing otherwise would. While there have
in, we are effectively paying ourselves costs and who almost certainly been some historical merits to this
rent, and the associated rental wouldn’t qualify for a conventional argument,2 the changing economic
income is not taxed, according to the home mortgage. The FHA has environment has rendered it flawed.
current tax law. In 2008, according quadrupled its insurance guarantees
to the Office of Management and on mortgages in just the last three
Budget, these tax breaks are both years. Currently, the FHA insures
about $145 billion. Note that this $560 billion of mortgages. 2
The study by Donald Haurin, Patric Hender-
shott, and Susan Wachter explores the wealth
accumulation and housing choices of young
households and confirms the joint nature
of the decision of house tenure and wealth
accumulation. On the one hand, homeown-
a
According to its website, the FHFA was “formed by a legislative merger of the Office of ership is an important component of total
Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), wealth. On the other hand, households need a
and the U.S. Department of Housing and Urban Development (HUD) government-sponsored minimum amount of wealth to purchase their
enterprise mission team. The FHFA regulates Fannie Mae, Freddie Mac, and the 12 Federal first house. Other authors, including Louise
Home Loan Banks.” Schneier and Gary Engelhardt, have analyzed
savings in response to differentiating housing
b
prices. Although results in some studies are
contradictory, in general, young households
in more expensive areas tend to save more.
T
with hyperbolic preferences would here is no hard and fast distinction between economic
say the following: “Next Christmas, and social benefits. In this article, we call the benefits of
I will buy modest gifts and use the homeownership that accrue to the individual household
savings for my retirement. But this “economic.” But homeowners may also confer benefits
Christmas, I’ll splurge.” Of course, on their neighbors and communities, or on the nation; we
when next Christmas comes around, term these benefits “social.” The basic argument for the social benefits of
the household splurges again! In effect, homeownership is that homeownership improves homeowners’ incentives in
the household is really two households: a number of ways. Because of transaction costs, homeowners are less likely
a patient household when it thinks to move and hence remain more embedded in their communities for a longer
about its long-term preferences and time. This may promote civic involvement. Homeowners are also residual
an impatient household whenever claimants of their property: When it comes time to sell, they reap the profits
it actually confronts an immediate and suffer the losses. Thus, they tend to maintain their properties and are
choice.4 These preferences induce what better neighbors than renters.
economists call a dynamic inconsistency. According to Edward Coulson’s Business Review, the empirical evidence
A direct implication of the for the social benefits of homeownership includes the following. First,
hyperbolic discounting model is owner-occupants maintain their dwellings to a greater extent than renters
that households with these types of (or landlords) maintain theirs: More money is spent on maintaining owner-
preferences will try to pre-commit occupied housing than is spent on maintaining rental property; homeowners
themselves to a scheme that will be spend more time gardening than renters; and rental property depreciates
faster than owner-occupied property. Second, homeowners’ children are
more successful, measured by such factors as lower teenage pregnancy rates
3
Richard Thaler’s article was one of the first
and higher educational attainment, than kids from non-owner-occupied
to point out several “anomalies” in households’ dwellings. Third, homeowners socialize more with their neighbors.*
saving behavior.
4
The article by George-Marios Angeletos,
David Laibson, Andrea Repetto, Jeremy Tobac- *
However, in a recent study, Grace Wong Bucchianeri finds little evidence that homeowners
man, and Stephen Weinberg provides a good are happier by any of the following measures: life satisfaction, overall mood, overall feeling, and
review of this literature. general moment-to-moment emotions.
10
10
Notice the discrepancy between the charts
5 derived from HMDA data and those derived
from LPS data. This discrepancy arises because
0 the HMDA chart is based on all mortgage
1991 1993 1995 1997 1999 2001 2003 2005 2007
applications, while the LPS chart is based on
approved loans.
year
11
A working individual typically starts with two
Data source: Federal Housing Finance Agency (annual); last point plotted: 2008 weeks of vacation time annually.
HOMEOWNERSHIP AND 88
3.5
INVESTMENT second - left axis 86
Another argument for homeown- 3
ership often heard is that housing is a 84
relatively safe asset that pays off in the 2.5
82
long run. This argument turns out to
2 80
be a myth as well.
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-30
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
12
year
The 10 cities are Boston, Chicago, Denver,
Las Vegas, Los Angeles, Miami, New York, San
Diego, San Francisco, and Washington, D.C. Data source: Federal Housing Finance Agency; S&P; Dow Jones (annual); last point plotted: 2008
Upper-Income Taxpayers, 2003
price movement. For instance, between One question naturally arises: Case-Shiller house-price index
January 1998 and December 2007, the Is owning one’s residence the most futures and options) on the Chicago
correlation coefficients of the S&P/ efficient way to make a portfolio Mercantile Exchange. However, in
Case-Shiller house price index with investment in housing? Remember, the euphoria of the housing boom of
the Lehman aggregate bond index owning a home subjects a household’s the past decade, they attracted little
and the S&P 500 stock index are, wealth to shocks to local housing attention from builders and developers.
respectively, -0.056, and -0.086. This markets, which are much more volatile Investors prefer to make bearish bets
means that when financial assets fall in than the housing market as a whole. via more customized instruments.
value, house prices typically rise, and In principle and ideally, one should be In June 2009, Karl Case and Robert
vice versa. Thus, housing potentially able to take advantage of movements Shiller, the namesakes of the Case-
can be used to hedge against shocks in house prices without having to own Shiller house-price index, launched
to investment in stocks, at least during one’s residence. Furthermore, one a product called MacroShares to
the period in question.14 should even be able to hedge against open up the market in order to retain
house-price movements in the local investors. MacroShares are securities
market by owning shares of other that reflect the value of the S&P/Case-
14
Given the low correlation coefficients, we do housing markets. While such markets Shiller house-price indexes in 10 large
not wish to emphasize the potential benefits
of homeownership as a hedging instrument,
exist, they are as yet not feasible for urban centers. The securities are issued
especially since only 40 percent of households most households. in pairs: one for investors who wish to
participate in the stock market, while nearly Housing derivatives first appeared bet on the upward movement of house
two-thirds of Americans own their primary
residences. in 2006 as futures contracts (S&P/ prices, and one for those who think
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