A Mortgage For Every Family?

The ideal of owning one's own home, be it log cabin or row house, is that of a static society.  The rose garden and cabbage and poison ivy patch are nostalgia for a rural past.  The average individual changes residence 12 times in a lifetime, 9 after age 18.  Housing needs change over a life cycle from baby crib to nursing home; so does ability to afford housing.  How attached should one be to one's current residence?  Rent or tent out until settled.

The concentration of population in large cities and reduced number of people per household mean that a growing share live in apartments in multi-unity buildings, condominiums, and cooperatives.  Ownership means less, and has fewer rights, in such units than in single family detached housing.

Two thirds of households owned their home at the beginning of the housing crisis.  This was too high an ownership rate, as the crisis revealed.  It is likely to remain too high for the foreseeable future.  It is not just a question of too many homeowners.  For some owners it is a result of buying a home that is too large, too expensive to maintain and operate within their means.  The average size of new single family houses rose from 1,500 square feet of floor space in 1970 to 2,277 in 2007 (inching down slightly in 2010).  Meanwhile the average number of occupants declined.  Call it housing inflation.

As long as unemployment remains in the high single digits, foreclosures persist.  More foreclosures drive down the price of housing.  The lower price drives more mortgages "under water" -- that is, the value of the house lower than the debt.  Many who can afford to pay their mortgage will stop and walk out and let the bank take a loss.  Some will buy another house at a lower price; others will rent.  Voluntary default adds to foreclosures of buyers who can't afford to keep up mortgage payments, driving down housing prices even lower.  The resulting decline in housing construction helps prolong and deepen the current recession.

The process is self-reinforcing.  It could have been prevented by requiring a substantial down payment, but it is too late now.  Substantial down payments are needed to reduce scuba diving and avoid a downward spiral in the future, but imposing them now depresses the market for housing.  What we face is not a fallout from a fiscal crisis but a chronic long-term housing depression.

When will the housing crisis end?  Not this decade, probably not the next.  The baby boomers will be selling their homes, while the generation buying is considerably smaller.  This is the first time in our history that a succeeding generation is smaller than its predecessor.  With fertility at bare replacement, future generations are likely to be no larger than Generation X.  The baby boomers drove down household size, from 3.14 in 1970 to 2.57 in 2009, raising the ratio of households to population.  More lived alone, more were single parents, and fertility declined.  This reduction in household size is over for now, and could be reversed.

Is housing a good investment?  Probably yes, if you bought before the late 1990s and sold by 2007.  Almost certainly no, if you bought it later and still own it.  No for the foreseeable future.

National averages and trends overlook local differences.  Nearly all housing is immobile; only its occupiers move.  Location is everything.  The economy is always changing.  Some industries grow, others shrink, and new plants and firms are changing location.  There are always local shortages, and local surpluses.

The nation is strewn with abandoned villages and small towns.  The rural-urban migration is essentially over.  More recently, housing was abandoned in nearly all central cities, the victims of  suburbanization.  The price of land and housing rose in the suburbs, fell in central cities.  Some cities, such as Detroit, have lost basic industries, with a decline in employment followed by a decline in population.  Housing values took a plunge.

Long-term investment in home ownership entails long term risks of changes in economic and demographic structure.  The housing vacancy rate has been increasing steadily from 6.3% in 1970 to 11.2% in 2009 and is expected to be driven higher by foreclosures.  Abandoned housing depresses value of other housing in the neighborhood.

We live in a dynamic economy and society.  Renting is not simply for those who cannot afford to buy or who do not plan to stay.  It is also a means of shifting economic risks to the lessor, who can reduce risks by investing in housing in diverse locations.  Renting is analogous to an insurance policy.  If the owner loses his job and cannot keep up with mortgage payments or property taxes, he loses whatever equity he has in his home. A renter in the same situation has less to lose.  

Subsidies to home ownership, specifically the deduction of mortgage interest payments from taxable income, bias the choice between owning and renting.  They have contributed to an unsustainable rate of home ownership.  They cannot be removed from those who have already purchased a home, but should be eliminated for future buyers.  Together with requiring a substantial down payment, they help limit ownership to those who can afford it, or limit the housing cost that the buyer is willing and able to assume

The author is Emeritus Professor of Economics at George Washington University. His latest book is The Decline of Leaning in America.

The ideal of owning one's own home, be it log cabin or row house, is that of a static society.  The rose garden and cabbage and poison ivy patch are nostalgia for a rural past.  The average individual changes residence 12 times in a lifetime, 9 after age 18.  Housing needs change over a life cycle from baby crib to nursing home; so does ability to afford housing.  How attached should one be to one's current residence?  Rent or tent out until settled.

The concentration of population in large cities and reduced number of people per household mean that a growing share live in apartments in multi-unity buildings, condominiums, and cooperatives.  Ownership means less, and has fewer rights, in such units than in single family detached housing.

Two thirds of households owned their home at the beginning of the housing crisis.  This was too high an ownership rate, as the crisis revealed.  It is likely to remain too high for the foreseeable future.  It is not just a question of too many homeowners.  For some owners it is a result of buying a home that is too large, too expensive to maintain and operate within their means.  The average size of new single family houses rose from 1,500 square feet of floor space in 1970 to 2,277 in 2007 (inching down slightly in 2010).  Meanwhile the average number of occupants declined.  Call it housing inflation.

As long as unemployment remains in the high single digits, foreclosures persist.  More foreclosures drive down the price of housing.  The lower price drives more mortgages "under water" -- that is, the value of the house lower than the debt.  Many who can afford to pay their mortgage will stop and walk out and let the bank take a loss.  Some will buy another house at a lower price; others will rent.  Voluntary default adds to foreclosures of buyers who can't afford to keep up mortgage payments, driving down housing prices even lower.  The resulting decline in housing construction helps prolong and deepen the current recession.

The process is self-reinforcing.  It could have been prevented by requiring a substantial down payment, but it is too late now.  Substantial down payments are needed to reduce scuba diving and avoid a downward spiral in the future, but imposing them now depresses the market for housing.  What we face is not a fallout from a fiscal crisis but a chronic long-term housing depression.

When will the housing crisis end?  Not this decade, probably not the next.  The baby boomers will be selling their homes, while the generation buying is considerably smaller.  This is the first time in our history that a succeeding generation is smaller than its predecessor.  With fertility at bare replacement, future generations are likely to be no larger than Generation X.  The baby boomers drove down household size, from 3.14 in 1970 to 2.57 in 2009, raising the ratio of households to population.  More lived alone, more were single parents, and fertility declined.  This reduction in household size is over for now, and could be reversed.

Is housing a good investment?  Probably yes, if you bought before the late 1990s and sold by 2007.  Almost certainly no, if you bought it later and still own it.  No for the foreseeable future.

National averages and trends overlook local differences.  Nearly all housing is immobile; only its occupiers move.  Location is everything.  The economy is always changing.  Some industries grow, others shrink, and new plants and firms are changing location.  There are always local shortages, and local surpluses.

The nation is strewn with abandoned villages and small towns.  The rural-urban migration is essentially over.  More recently, housing was abandoned in nearly all central cities, the victims of  suburbanization.  The price of land and housing rose in the suburbs, fell in central cities.  Some cities, such as Detroit, have lost basic industries, with a decline in employment followed by a decline in population.  Housing values took a plunge.

Long-term investment in home ownership entails long term risks of changes in economic and demographic structure.  The housing vacancy rate has been increasing steadily from 6.3% in 1970 to 11.2% in 2009 and is expected to be driven higher by foreclosures.  Abandoned housing depresses value of other housing in the neighborhood.

We live in a dynamic economy and society.  Renting is not simply for those who cannot afford to buy or who do not plan to stay.  It is also a means of shifting economic risks to the lessor, who can reduce risks by investing in housing in diverse locations.  Renting is analogous to an insurance policy.  If the owner loses his job and cannot keep up with mortgage payments or property taxes, he loses whatever equity he has in his home. A renter in the same situation has less to lose.  

Subsidies to home ownership, specifically the deduction of mortgage interest payments from taxable income, bias the choice between owning and renting.  They have contributed to an unsustainable rate of home ownership.  They cannot be removed from those who have already purchased a home, but should be eliminated for future buyers.  Together with requiring a substantial down payment, they help limit ownership to those who can afford it, or limit the housing cost that the buyer is willing and able to assume

The author is Emeritus Professor of Economics at George Washington University. His latest book is The Decline of Leaning in America.