Do Not Buy That House

The dream of owning your own home is as American as apple pie--and (supposedly) better for you. Over and over, we are told that homeownership will make you happier, healthier and wealthier. Heck, it's even supposed to make you a better citizen.

Of course, there are times when, depending on your age, your savings and your income, buying a home can be a smart decision and an excellent way to build wealth. But is buying a home really such a universally good idea?

It's hard to separate fact from propaganda.

Certainly, the virtues of ownership have been preached loudly and from on high. As early as the 1920s, Herbert Hoover extolled home ownership as a pillar of family life. Nearly 80 years later, President Bush reiterated the message, stating "there's no greater American value than owning something, owning your own home and having the opportunity to do so."

Homeownership has been touted as civic responsibility, "moral muscle" and a bulwark against communism. A 1922 pamphlet from the National Association of Real Estate Boards even promised that it would put the "MAN back in MANHOOD." Over the years, it has been claimed that homeowners vote more, join more voluntary associations, take better care of their residences and have better-educated kids.

But to realize that America's mania for home-buying is out of all proportion to sober reality, one needs to look no further than the current subprime lending mess. In the last decade, riskier lending practices combined with historically low interest rates and federal subsidies have encouraged a wave of low- and moderate-income households to buy homes.

As interest rates--and mortgage payments--have started to climb, many of these new owners are having difficulty making ends meet. At the moment, a record 250,000 mortgages are in foreclosure--that works out to more than 0.5% of the entire U.S. mortgage market.

Those borrowers are much worse off than before they bought. "There's the loss of the initial investment, ruined credit ratings and the psychological trauma associated with foreclosure and being evicted," says William Rohe, co-editor of Chasing the American Dream and a professor of urban studies at the University of North Carolina at Chapel Hill.

Worse, foreclosures are often concentrated geographically, meaning that neighborhoods that were already badly off now have even more abandoned properties. Conversely, ownership can trap a family in a declining neighborhood, while renters move on more easily.

Steven Bourassa, a professor at the School of Urban and Public Affairs at the University of Louisville, recalls attending a speech in which the mayor of a Kentucky town was bragging about expanding homeownership. As an example, the mayor cited a disabled woman with an income of $8,500 a year who was able to acquire her own home with the help of a federal voucher program.

"I think that's nuts," Bourassa says. "She can afford the mortgage payment, but what if something goes wrong with the house? Some of these people would be more stable if they had just stayed in the rental sector."

Even for the better-off, buying isn't always a good idea. For some, moving from the city to the suburbs has high psychological costs. People in the suburbs can feel more isolated and less involved in their communities. Longer commutes take a toll. Taking care of a home takes time, money and energy. New homeowners need to be ready to trade in existing hobbies for lawn-mowing and trips to Home Depot.

And, practically speaking, it's fairly obvious that homeownership isn't right for everyone at every stage of their lives. Downsizing retirees might be better off selling their homes, investing the cash to generate income and moving into low-maintenance rentals. And young people who need mobility for their careers can end up feeling hamstrung by the inability to sell quickly.

What about all the social benefits attributed to homeownership? It turns out that many of the supposed benefits of ownership are likely due simply to family stability, for which homeownership is an excellent proxy.

For instance, while it is true that the children of homeowners have scored better on standardized tests than the children of renters, there's little to suggest that ownership per se is the cause of better performance.

"Some research has suggested that it isn't whether parents own or rent, but the mobility of the household," says Rachel Drew, a research analyst at Harvard University's Joint Center for Housing Studies. In other words, it's likely that families who stay in one place for a long time (renting or buying) are doing better by their kids than families that move often.

"All of these things we say are benefits of homeownership in the U.S. I think would also be benefits of long-term rental tenancy," says Bourassa.

Certainly there are plenty of stable, wealthy, well-educated places in Europe, at least, where homeownership is far rarer than it is in the U.S. Nearly 70% of all Americans own their own homes; only 34% of the Swiss do. Thriving cities like Hamburg, Amsterdam and Berlin have rates of ownership of just 20%, 16% and 11% respectively, according to the United Nations.

So if something in your gut--or on your bank statement--tells you that now is not the right time to buy, resist the pressure. There may be no place like home, but there's no reason you can't rent it.