There’s nothing wrong with renting.
That would be a sensible message for the consoler-in-chief to give struggling Americans attempting to raise their living standards. As President Obama continues his second-term middle-class promotional tour, however, he’s shifting his focus to the virtues of homeownership instead.
“A home is supposed to be our ultimate evidence that, in America, hard work pays off and responsibility is rewarded,” he said in a heavily promoted speech in Phoenix. “We have to give more hard-working Americans the chance to buy their first home.”
There’s only one problem with that: We’ve traveled down this road before, and instead of leading to some magical Valhalla, an overemphasis on homeownership led many Americans badly off-course and left the nation’s entire housing market in tatters.
The so-called American Dream
Owning a home, of course, is a central tenet of the so-called American Dream. In general, homeownership helps build more-stable communities and allows ordinary families to accumulate wealth. There’s an essential caveat to this aspiration, however: Owning a home isn’t for everybody, and breakdowns in the safeguards meant to restrict homeownership to those who can afford it can have disastrous consequences.
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That’s what happened during the housing boom that began around 2003 and ended in an epic bust that probably would have caused a full-blown depression without dramatic government intervention. The housing meltdown was a complex development with many villains, but it can be summed up in one statement: Too many people bought homes.
Here’s a chart showing how the homeownership rate ballooned during the housing bubble, then plunged back toward normal levels during the bust:
The swelling that peaked in 2005 was the result of many abuses, and in his speech, Obama did refer to “reckless buyers” who contributed to the bubble, trying to profit by speculating on homes they never intended to live in. What Obama didn't say is that maybe we should reexamine the whole idea that owning a home is “the most tangible cornerstone at the heart of middle-class life,” as he (awkwardly) put it.
For one thing, investing the bulk of your savings in a generally illiquid asset may not make sense in an unpredictable global economy in which staying in one place may now be the exception rather than the rule. As most workers know, loyalty is a thing of the past at many companies, among bosses and workers both. The most promising young workers these days are taught to prepare for as many careers in as many different places as it takes to be successful.
One problem that has slowed the recovery during the past few years, in fact, has been poor labor mobility, due at least in part to people who would lose money on their homes if they had to sell in order to take a better job someplace else. A lot of homeowners in bankrupt Detroit, for instance, might clear out if only they wouldn’t have to take a $50,000 or $75,000 loss in the process.
A big commitment
Committing to a 30-year-mortgage also remains a suspect decision in an economy with far weaker job security than most workers enjoyed before the recession that began at the end of 2007. Policymakers at the Federal Reserve and other government agencies would love to see more people buy homes, since it tends to stimulate lots of spending on items such as furniture and appliances. Still, consumers reluctant to make that kind of commitment — lest they end up laid off and financially strapped — are actually being prudent, given the turbulence we just went through.
In several other wealthy countries, people prosper with far less emphasis on owning a home. The average homeownership rate in the United States during the past 30 years has been about 63%. In Germany, it’s around 41%; Switzerland, 38%; Denmark, 52%. Some economists think high homeownership rates may even slow economic growth, because workers lose mobility, spend more time commuting and become less inclined to innovate.
Obama’s housing plans, like his other ideas on the economy, are mostly sensible, centrist proposals that might do some good if ever enacted. He wants to impose new rules making it easier for homeowners to refinance at lower rates, for instance, and streamline regulations governing credit so more buyers can qualify for loans. He’s also putting his weight behind plans to wind down the huge mortgage agencies Fannie Mae and Freddie Mac, which will probably happen in some form, eventually.
To be fair, Obama also says — in step five of his five-step plan — that working families should have “a decent place to rent” if buying a home isn’t an option. What he doesn't do is urge Americans to reexamine the basic premise that got millions of them into deep trouble: That owning a home is a necessary step on the road to success.
Buying a home still makes sense for many, but it’s not the default option it once was. A better message for ambitious strivers might be to go where the action is, and when the action is no longer there, go to wherever it moved to. And if you buy a home along the way, make sure it won’t anchor you to sinking prospects.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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