Waking Up from the American Dream
IF you want to see the American process of buying and selling a home mangled to the point of looking like a bloody victim in The Texas Chainsaw Massacre, then you’ve come to the right place.
When it comes to housing, I am the idiot.
For my entire life, I have lived in a world where home ownership was the only acceptable ideal. When I rented, I felt like I had failed. I felt truly successful only when I “owned.”
Looking at my mortgage statement, using the word “owned” is as ridiculous as using the word “married” to describe the way I look at Gisele.
While owning a home is still a great idea for many people, I think we’ve all become too sold on seeing the “sold” sign in our front yards. And that includes our government. For years they’ve done everything possible to make it easy for Americans to own a home—all the while never even bothering to figure out whether that was even a worthy cause.
The collapse of the housing bubble has finally made people begin to question many of the pro–home ownership policies that have long been in place. But maybe the discussion shouldn’t be limited to interest rates, tax breaks, or how so many seem to believe that we have the right to own property rather than the right to pursue happiness. Maybe instead we need to take a big step back and reconsider whether home ownership is something that the government should even be involved in. Should the American dream really be defined by signing a piece of paper that “indebts” you to a bank for decades?
That question is one big reason why I’ve started to rethink many of the arguments in favor of home ownership that I’ve always taken for granted (my latest home appraisal is another). After all, maybe it’s because idiots like me relied on conventional wisdom instead of common sense that we now find ourselves on the wrong side of what was quite possibly the largest financial bubble of all time.
The idea that real estate is a great investment seems to be beyond reproach. It’s the Angus steak of sacred cows. (The Kobe beef of sacred cows comes later in this chapter.)
The thought that our residence doubles as a revenue stream and wealth-builder is a concept that’s handed down from generation to generation. Stories of “I bought that house for $45,000 and sold it for $250,000!” litter our memories and were seemingly reinforced with real-life evidence that came in the form of fancy-looking charts and graphs.
The one exception would be the recent housing bubble. Looking at that chart, you really get a sense for what an incredibly dramatic and historic event it was.
This graph suggests that you could’ve bought a home at any time in history and sold it at any other time for a profit. Usually a big one.
But that chart is about as misleading as a Barack Obama budget projection. Why? Because it’s not adjusted for inflation. While our perception of housing prices is one of a smooth slope upward, the truth is that it’s been more like a trail of moguls than a ski jump.
For those of you who live where it’s always warm, moguls = bumpy skiing. Also, I hate you.
The chart to the left also shows the history of home prices, but this time it’s been adjusted for inflation.
It’s almost sacrilegious myth-busting to suggest that housing prices are actually not on an interminable upward swing, but it’s true. The American saga of real estate is one of a relatively flat history—save for one flash of irrational exuberance over the past few years. The reality is that there have been only two good ways to make real money in the housing market over the past century: time the peaks and valleys perfectly, or buy a house during the Great Depression and sell it afterward.
If you’re under 100 years old, option two was probably never very practical.
Everyone knows the story of a homeowner who’s been able to time the peaks. I’m one of them. I’m proud to say that I sold my house in 2006—right near the absolute peak of the housing bubble. The problem was that I then had no place to live. So I also bought a house near the absolute peak of the market.
Being the super-savvy financial guru that I am, the new house that I bought was larger and more expensive than the house I sold. But that’s pretty common, right? As we get older, we generally get wealthier and are able to buy bigger houses. But that also locks you into a pattern: if you fail, it’s likely to be on the biggest bet you’ve ever made in your life. Do you really know enough about the real-estate market to play those odds? I now know that I don’t.
Many people rationalize their purchase by using that argument, but renters actually spend, on average, about 26 percent less on rent than owners do on their mortgage. At the height of the bubble, the difference was even more remarkable: renters were spending an incredible 66 percent less.
If renters are disciplined enough to save or invest the difference in something safe (like guessing at the hottest upcoming Christmas novelty toy or something), they wind up way ahead of the game, especially in the short term. Plus, owners—unlike renters—have to worry about losing their life savings if they mistime the market. The recent housing bust put millions of homeowners upside down on their mortgages—and caused many people to rethink the supposedly settled science of home ownership.
I’ll have to ask Al Gore if questioning this settled science makes me a Housi-cost denier.
We also tend to forget that there’s more to the cost of home ownership than meets the eye. About 7 to 10 percent of the cost of buying a home goes to closing costs and other transaction fees. Upkeep on the property ranges from about 2 to 4 percent per year. Property taxes can approach 2 percent of the home’s value each year, and, in states like New York, can exceed 8 percent of the area’s median salary. And don’t forget interest. When you sign on the dotted line for a 7 percent, 30-year mortgage on a $300,000 house, you’ve actually decided that home is worth $718,527.60, because that’s how much you will have paid for it by the time you stop getting monthly nastygrams from your mortgage company.
Not to mention, you have to mow the lawn, fix the pipes, and shovel the driveway (or pay/threaten neighborhood kids to do it).
That is really a question of whether the chicken owned or rented the egg. Yes, it’s undoubtedly true that homeowners are typically in much better financial shape than renters—some estimates have found that their net worths are about 35 times higher—but there are downsides to having so much of your wealth (if you’re lucky) locked up in a home. As the Economist explained, “It sucks up disproportionately large amounts of money, falling foul of the idea that investors should diversify: in America the equity tied up in houses accounts for 45 percent of the net worth of the average householder. And it is illiquid. If you need to raise money, you cannot sell a room or two, whereas you can always sell a few shares.”
But if owning a home isn’t an obvious way to build wealth, then why are owners more wealthy? It’s actually common sense: When people get money they buy houses with it. Homeowners are also twice as likely to be married as renters, meaning that they’re also more likely to be economically stable and/or have two incomes. Plus, homeowners are generally older and have had more time to accumulate wealth than renters.
It’s a boring but happy fact of life in America—the longer you live in our (somewhat) capitalist system, the more likely you are to set aside money to make a major investment that costs several hundred thousand dollars.
Our perception of homeowner stability generally comes from the fact that stable people decide to own homes. They’re not made stable by their purchase.
Owning a home does help in one major way: If things go well it basically forces people to save. Renting, on the other hand, can be an effective stupidity tax for some people. “Look at all this extra money I have! I should buy lease a BMW!”
It’s like looking at prisons and wondering why they’re all full of criminals. They’re in prison because they’re criminals.
That may be true in some ways, but involvement doesn’t necessarily mean positive involvement. In fact, one of the most common ways that homeowners become “involved” in their communities is by supporting restrictive zoning and environmental laws in their towns and cities.
Politicians have realized that pushing local initiatives with “green” or “clean” in the title is a nice way to give them something to do, plenty of money to do it, and a fancy photo-op to boot. So-called open space laws are virtually guaranteed to pass when voted on in local elections, but there’s a major downside that you won’t hear in the congratulatory speeches: they create housing shortages that artificially increase prices.
One thing I’ve learned over the last couple of years: artificially increasing home values . . . bad.
For example, Houston, which has no zoning restrictions at all, also has among the most affordable housing of any major city in America. Only a few cities (all of which are much smaller than Houston) are able to beat its $700 a month average mortgage payment. That’s 25 percent less than Detroit, 44 percent less than Philadelphia, 48 percent less than Barack Obama’s Chicago, and, if you’re moving from Nancy Pelosi’s San Fran-cisco—you’ve just saved yourself 82 percent.
Because Houston generally avoided the artificial bubble, the city was better shielded from the very real collapse all too familiar to other communities across the country. Their economy was resilient because it was built on a foundation that is relatively free of regulation and government interference. After all, strict zoning laws that stop businesses from building near your neighborhood also restrict those businesses and jobs from building in your city, hurting the local economy and driving up the price of property ownership.
Yes, there are some areas of Houston that would even make the inventor of strip malls contemplate suicide, but there are also plenty of quiet areas with gorgeous housing and scenic landscapes. Instead of overreaching and broad zoning laws, Houston communities use deed restrictions to keep neighborhoods sensible without massive economic intervention.
The result of Houston’s freedom is clear! People are voting with their feet and moving to Texas at about twice the rate as heavily regulated states like California. Texas created more new jobs in 2008 than every other state in the country . . . combined. And, as the housing crisis was kicking in during 2006 and 2007, Houston had the largest population increase in the entire country. It could be that people suddenly became infatuated with the Astros, but somehow I doubt it.
Research shows that this perception is essentially a myth. When you figure in basic things like household income, housing quality, and health, the difference between renters and owners in perceived happiness mostly disappears. Where there is a small difference, it seems to usually favor the renter.
For example, homeowners spend more time cleaning and doing household chores and less time participating in “active leisure” than their renting counterparts. As a guy who bought a “quaint-fixer-upper” that wound up taking more of my time than working, sleeping, and raising two daughters combined, I’m particularly sensitive to the amount of work a home can require. I’m also particularly receptive to considering arson to erase such work.
Glenn Beck Rule 892: If it’s “active” it ain’t “leisure.”
But it’s not just pure self-inflicted laziness that costs homeowners happiness—owners also spend less time with their families, partly because they spend more time commuting. While it personally benefits me to have you in your car with your radio on as much as possible, you’d probably rather spend time with your family instead of listening to me whine about Woodrow Wilson for another hour. But, because that beautiful house you bought is 27 miles away from your office, you’re stuck with me instead.
While the sum of this research doesn’t make me want to title my next book Rent Your Way to Happiness, it’s far from the runaway win for homeowners that most of us would expect.
I’m not trying to say that home ownership is a horrible idea. It works for many people. But the perception that owning is always the best option for everyone is simply a relic from the past. It was created when our grandparents lived in the same town for 50 years, worked at the same job for 30 years, and stayed married for longer than six months.
These days over 20 million Americans change jobs every year and the typical worker changes jobs about ten times before age 40. We move from town to town, state to state, and, increasingly, from country to country. Estimates show that the average person now moves about 12 times in his or her life. Unless you’re planning on living to 360 years old, how does a 30-year mortgage fit into that lifestyle?
Given how much we all move around, buying a home with a 30-year mortgage is akin to buying a new car with a five-year loan and selling it after 10 months, only to buy another car with another five-year loan. Of course, the difference is that we expect auto values to constantly fall, unlike home values, which we expect to constantly rise. Just ask one of the Lehman Brothers how infallible that plan is.
The truth is that a home may be where the heart is, but it’s also where the rest of your body is stuck. Owning a home can put you in a position where the local economy dictates your personal economy. For example, think about “Allentown.” Not the real Allentown in Lehigh County, Pennsylvania, that has had almost exactly the same unemployment rate as the rest of the country for the last 20 years. I mean, Billy Joel’s “Allentown,” that miserable place where they’ve taken all the coal from the ground, and all the union people crawled awaaaayaaayyyaaayyyyaaayaaaayayayay.
Union people crawled away? Doesn’t sound that bad.
You see, when you’re living there in Allentown, and they’re closing all the factories down, the appropriate response is not to start killing time, filling out forms, and standing in line. Instead, it’s a much better idea to pack up and move to Orlando. Or some other place where jobs are available.
If you’ve ever sung “it’s getting very hard to staaaaayaaayyyaaayyyyaaayaaaayayayay” about your town—it’s time to stop staying.
But, when you own a home, that decision isn’t really yours. It depends on convincing someone you don’t know that the town you want to leave is a place they want to live. Then, they have to want it bad enough to buy your house at a price that doesn’t put you tens of thousands of dollars in the hole.
There’s no better way to understand this than to attempt a career in radio. It is a business for pseudopsychotic antisocial nomads (and I’m proud to be a part of it). Think about the radio stations you listen to in your hometown. If you like news/talk, there are probably a maximum of three stations that you can listen to. That means if you’re a guy who makes a living by doing mornings on a news/talk station, there are about three possible jobs in the entire city that you want. In radio, your only chance to continue doing what you love is to uproot your family and move to an unfamiliar city halfway across the country.
So that’s exactly what I did. In my career I’ve worked in Seattle, Houston, Tampa, Louisville, Corpus Christi, New Haven, Washington, D.C., Philadelphia, New York City, Provo, Baltimore, Phoenix, Dayton, Mount Vernon, Puyallup, and yes . . . Walla Walla, Washington.
In my chosen profession, moving around is normal (if you can use that word when talking about radio). But, in most other (sane) careers, people tend to see their current community as their sole source of opportunity. For a very basic illustration, let’s go back to Allentown and assume you’re a nurse who lives there and is looking for a job. As I write this, Monster.com lists 28 recently posted openings for nurses within 30 miles. But if you open up your job search nationwide, you find 2,926 openings. My calculator tells me that’s 104.5 times more opportunities. It’s not the nineteenth century, where it would take you three years to go state to state in a wagon train. If your dream job doesn’t exist in your own backyard—move your backyard.
You may need to weigh your job opportunities against your carbon-dioxide emissions and the harm you’ll be doing to the environment. Plus, if you make more money you’ll consume more, which means more waste and greenhouse gases. In other words, if you move for a better job you’re pretty much the BTK of the earth.
You might think you’re abandoning your community by leaving your hometown, but you very well might be helping your country by making the economy more efficient. You are the supply. The supply needs to be where the demand is. But if you own a home, you limit your mobility. It could take months or years for a homeowner to up and leave, whereas, for a renter, it could take a day. That difference can be seen clearly in the statistics. As the housing crisis kicked in and the market became less forgiving, the number of Americans changing residences dropped to levels not seen since 1962, when the country had 120 million fewer people in it.
It’s not just schlubs like me who have these theories. British economist Andrew Oswald found that a rise in the level of home ownership was associated with a rise in the level of unemployment. He found that when one category was high, the other usually was as well. Spain had the highest rate among industrialized nations in both unemployment and home ownership; Switzerland had the lowest rate in both.
Oswald found that not only does home ownership contribute to joblessness, it makes workers take jobs that aren’t great fits for their skill sets because they base their employment decisions on where they live rather than what they do best. Sure, there are a lot of reasons other than employment to stay in a certain area (like easy access to a Sonic), but it’s important to recognize what you may be giving up by staying put.
For decades, under both Republicans and Democrats, Washington has tried to encourage the belief that home ownership is the only way to go. Millions of Americans, including me, bought into it. We all took pride in the rise in home ownership rates, even while we crinkled our noses a bit when we considered the aftereffects. It made us feel good . . . and the government knew it. That’s why tax advantages, low-interest-rate loans, perks for first-time buyers, and other benefits were offered to anyone who would take them. And while it’s still the home buyer’s name on the contracts, these pathways to home ownership were presented by the government and mortgage companies as no-lose propositions. A chance to be part of the party. And most of us lapped it up.
But while our government celebrated itself as the savior of the poor, who do you think is really hurt when things go bad? People with money in the bank and stable employment are not the ones who get foreclosed on. The fact that I made the biggest purchase of my life at the absolute peak of the market might tell you a little about my intelligence, but as long as I keep my job(s), I should still be able to make my mortgage payments. It’s those who just barely cleared the line, those who were artificially put into homes they couldn’t afford by government policies designed to entice them to do so, who are first in line to really get burned. We’re taking good, responsible citizens who would likely be good, responsible renters and turning them into homeowners-in-default, left to hope for massive government intervention to save them from bankruptcy.
U.S. Home Ownership 1965-2008
The policies might have felt good at the time—like we were somehow doing the world a favor by ignoring income, credit, and stability—but, in the end, is the collapse of an economy worth that temporary warm feeling? Is the heroin high worth the heroin hangover?
On the other hand, the 6,000-calorie German chocolate cake was DEFINITELY worth the inevitable pointing and laughing at my love handles. (My wife, Tania, is prohibited from commenting on the previous sentence.)
Ahhhh, we’ve finally gotten to the Kobe beef of sacred cows: the mortgage interest deduction. I can already feel you getting ready to light this book on fire for my even bringing the topic up.
The deduction, which allows homeowners to deduct their annual mortgage interest on their federal tax returns, certainly has its strong points: The government takes too much of our money; enough of us have problems paying our mortgage as it is; and touching the deduction is political suicide.
As we’ve seen over the past couple of years, owning a home isn’t just about smiling kids playing on the swing set in the backyard, neighborhood barbecues, and pool parties. It’s a huge and sometimes dangerous investment. Should the government really be encouraging it with such massive economic incentives?
If entitlements are the third rail of politics—the mortgage interest deduction is the giant wall in the middle of the tracks. Any politician who publicly entertains eliminating it will find his or her chance of getting reelected about the same as that of Mahmoud Ahmadinejad becoming prime minister of Israel.
If the deduction really acted as a way for people to keep more of their own money, I might understand it. But that’s not typically what happens. In practice, it just allows people who would already be buying a home to buy more than they normally could have afforded.
Harvard economist Ed Glaeser put it this way: “The bulk of the benefits go to fairly rich people who aren’t particularly close to the margin between owning and not owning. . . . It mainly serves to induce prosperous people to buy bigger homes and pay more for those homes.”
What he didn’t say is that those people must borrow more and more money and become even larger investors in a realestate market they probably don’t understand. Then, once they’re in the house, they have higher utility bills, higher property taxes, and more room to fill with useless junk.
Where are liberals on this? The mortgage deduction makes billions of tax dollars disappear and is a huge gift to the mortgage and real-estate industries. All those hedge-fund billionaires buy larger and larger properties because those dastardly rich people can get the deduction too. It moves people away from renting, which means they buy houses far away from the cities they work in. That increases urban sprawl and greenhouse gas emissions, which leads to uncontrollable global warming. (You’ll know it’s here when temperatures cool for a decade.)
Our government has seemed to move from tax policy to attempted behavior control. Our laws make it seem more sensible to invest in a home than in almost anything else, but for what benefit? Research suggests that the main positive attribute of a neighborhood with more home -owners than renters is the number of gardens. Flowers are nice, but I’m not sure that deducting 30 years of interest on a six-figure investment is the best way to get more of them. “Give people who plant a garden a subsidy to buy mulch and leave it at that,” said Glaeser.
Am I ready to dissolve the deduction? Not quite. Until the government decides their spending is going to be more responsible than Eliot Spitzer in rural Nevada—they aren’t getting another path to my cash. Making the most untouchable tax break in the world disappear would have to be part of a large-scale tax-reform package.
And not President Obama’s, I mean a good one.
My point isn’t that owning a home isn’t the best situation for many, it’s just that it’s not always the best situation for everyone. The unquestionable superiority of home ownership has not only been ingrained into our societal DNA, it’s also been a main priority of government—supported, urged, and pushed by policies at every level.
But perhaps it’s time to start thinking about what the American dream is really supposed to represent. A full 65 percent of American homeowners say that the “dream” is one of the reasons they purchased their home. But the American dream isn’t about deductions, mortgage rates, or even that racist white picket fence. In fact, it’s safe to say that when our Founders were designing the American dream, a Realtor wasn’t required to achieve it.
The American dream is not about owning a home, it’s about owning your destiny. For many, buying a home is an important step in maximizing their chance at the real American dream, but it’s important to recognize that it’s not the only way.
Perhaps idiots like me will someday finally learn that.