People Don’t Save To Save — Promoting Wealth Through Homeownership

Promoting homeownership in the wake of the Great Recession that still has 14 percent of households underwater on their mortgage, delinquency rates on single family mortgages nearly 5 times their pre-crisis highs, and a foreclosure rate that has just now hit 2007-levels, is not exactly a timely public policy position to hold.

Critics rightly argue homeownership is an expensive, risky way to build wealth over time with returns that can often disappoint. Maintenance costs can be high, homeownership is the opposite of a diversified portfolio, and Yale Economist Robert Shiller finds home price appreciation barely beats inflation in the long-term.

“It would be perhaps smarter, if wealth accumulation is your goal, to rent and put money in the stock market, which has historically shown much higher returns than the housing market,” said Shiller, who was speaking at a panel discussion Thursday.

Yet, the wealth tables below show one stark fact:

When looking at various wealth gaps including age, race, education, and type of household, the largest gap is that between owners and renters.

To address these other gaps, government has enacted policies to address racial inequities, boost educational outcomes, and support single-parent households, albeit with varying success.

Likewise, we should promote homeownership, but not because homes are great investments. Homeownership promotes savings. Requiring mortgage payments over time forces people to save in ways stocks and bonds can’t.

People don’t save to save.

Fifty percent of Americans do not have access to 401Ks. Even so, President Obama’s MyRA is being rolled out with little fanfare. Those who already have access to 401Ks through their employer don’t really take advantage of them. One in five do not participate, and only about 10 percent contribute the maximum, according to data from the Center for Retirement Research at Boston College.

Yet, when people argue its better to rent than to own, they are relying on models that assume renters take their savings in housing costs plus the value of a downpayment and save it.

In other words, “assume a boat.” What happens if this assumption fails:

Beracha, Skiba, and Johnson (2012)…[find] when they drop the assumption that renters actual invest any annual savings in housing costs on top of the initial downpayment they find that renting rarely results in higher wealth than owning. Thus, they find that the forced savings aspect of homeownership is of fundamental importance in determining whether owning will lead to greater wealth.

The empirical question then is not whether owning a home produces a decent return, but whether it induces savings. Moreover, one must control for selection bias — specifically that homeowners are already better savers that’s why they are homeowners.

The evidence is in favor of homeownership.

When looking at the wealth of effects of homeownership, Di, Belsky and Liu’s (2007) study uses the PSID from 1984 through 1989 to estimate the share of income that was saved prior to the period when tenure transitions are observed as a means of controlling for this tendency.

They find that not only did homeownership increase wealth, but that“prior savings tendency was positively associated with increases in wealth as expected, but was not statistically significant and so did not appear to capture any important difference in household behavior that was not already accounted for by other explanatory variables.”

In other words, homeownership successfully boosts savings.

Homeownership comes with risks, but always renting doesn’t appear to be a successful wealth generating strategy.

In the wake of the crisis, the risks of homeownership are apparent. Analysis from the Joint Center for Housing Studies found that for those who owned in 1999 but were renting in 2009, median net wealth fell by $44,000, erasing approximately 80 percent of median net wealth.

At the same time, the median person who only rented during this time period saw wealth decline by $400 (see the table below). Moreover, people who moved from renting to owning and back to renting netted out slightly positive.

For those who successfully moved from renting to homeownership, wealth increased by $86,300, a ten-fold increase.

People can certainly become wealthier without owning a home, but, on average, they don’t.

See the below proposals for how we can promote homeownership:

Urban Institute: “The mortgage interest deduction (MID) is the largest single federal subsidy for owner-occupied housing, but the benefits are not evenly distributed among taxpayers. Only individuals who itemize deductions can benefit from the MID, and the value of the deduction increases with the marginal tax rate. If the government wishes to promote homeownership, a refundable tax credit available to all taxpayers would be more effective. This report presents new distributional estimates both of the current deduction’s benefits by income group, family type, and race/ethnicity and of proposals to eliminate, scale back, or replace the MID with more broad-based tax incentives.”

CBPP: “The mortgage interest deduction costs the federal government at least $70 billion a year but is not well designed to further its purpose of promoting homeownership. Converting the deduction to a credit would do more to support homeownership while also generating substantial revenues and making the tax code fairer. Those revenues could reduce the deficit and help address unmet needs for assistance with housing costs among modest-income owners and renters. In developing tax reform proposals, policymakers should give such a conversion serious consideration.”

Brookings: “The federal tax treatment of owner-occupied housing cries out for reform. Current tax policy offers unwarranted subsidies for the purchase of expensive homes by high-income taxpayers, but does little to promote homeownership by those of more modest means. To address these problems, I propose to replace the mortgage interest deduction with a 15 percent refundable credit and to reduce the size of the mortgages eligible for the credit while providing transition relief. Although this proposal is not ideal in every respect, it offers an effective way to scale back and better target the tax system’s housing tax breaks while raising revenue in a progressive manner. Over ten years, such a proposal could increase revenues by approximately $300 billion.”