declining home ownership

Washington Post columnist Catherine Rampell notes that US millenials (young people born between 1982 and 1994) are purchasing few homes compared to older generations. “Millennials want to buy houses”, writes Ms Rampell, “but they simply can’t afford to.” Indeed, they often cannot afford even to rent, so continue to live with their parents or move in with other relatives.

Ms Rampell does not see declining home ownership in itself as a problem. Indeed, she describes it as something we might celebrate.

The reasons behind this homeownership slide are certainly nothing to celebrate. But the slide itself might be.

We as a society tend to overvalue homeownership, at least from a financial perspective. Were it not for the psychic and sentimental benefits of homeownership, it’s otherwise hard to imagine financial advisers counseling their clients to dump all their savings into a single, giant, highly illiquid asset.

Especially one that, on average, shows such meager returns.

Over the past century, home prices have risen an average of about 0.6 percent per year, according to data from economist and Nobel laureate Robert J. Shiller. Investing in an index fund has, on average, far higher returns than owning, even after you take into account the costs of renting and the tax subsidies for buying.

For millennials, a mass lifestyle shift away from owning and toward either renting or crashing with relatives could be especially advantageous. That’s because buying a house not only locks up your savings; it also locks you, the owner, into a specific geographic location.

For workers who are just figuring out their careers … this seems especially wrongheaded. We want young workers to be mobile and to have as few frictions for job-hopping as possible.

Catherine Rampell, “Millennials aren’t buying homes. Good for them“, Washington Post, 22 August 2016.

HT Alphachat podcast of 4 November 2016 (free link), where Catherine Rampell discusses, with host Cardiff Garcia, her columns on shifting marriage trends and their potential significance.

I share Ms Ramplell’s view that home ownership is a poor investment; it is illiquid and promises poor returns compared to other investments. See, for example, my previous TdJ posts on the subject here, here, here and here.

Purchasing a home, even one paid almost entirely with borrowed money (a mortgage), is useful, though, in a way not mentioned in the column: the need to pay off a mortgage amounts to forced saving for retirement and old age. At least it used to be treated as forced saving. In the United States, for the past three decades homeowners have instead drawn on their equity, increasing their mortgage debt for spending on cars, furniture, holidays, all manner of consumer goods. Behavioural economist Richard Thaler explains how what used to be an accepted social norm changed so radically.

For decades people treated the money in their homes much like retirement savings; it was sacrosanct. In fact, in my parents’ generation, families strived to pay off their mortgages as quickly as possible, and as late as the early 1980s, people over sixty had little or no mortgage debt. in time this attitude began to shift in the United States, partly as an unintended side effect of a Reagan-era tax reform. Before this change, all interest paid, including the interest on automobile loans and credit cards, was tax deductible; after 1986 only home mortgage interest qualified for a deduction. this created an economic incentive for banks to use a home equity loan to finance the purchase of a car rather than a car loan, because the interest was often lower as well as being tax deductible. But the change eroded the social norm that home equity was sacrosanct.

Richard H. Thaler, Misbehaving: The Making of Behavioral Economics (Norton, 2015), p. 77.

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