The Myth of Wealth Accumulation through Home Ownership
Home “ownership” consists of a bundle of rights :in most people’s minds, they include the right to occupy, the right to exclude others, or privacy, the right make physical changes to the unit, the right to remain in occupancy, or security of tenure, the right to pass on to one’s heirs – and the right to sell at a profit. Of course all these rights are limited: by zoning rules which regulate what kind of business can be done there,, set-back requirements and building codes that regulate what can be done physically with the property, perhaps parking requirements, environmental rules, laws against creating a nuisance (noise, other forms of conduct, fire codes – and in most cases obligations to opay a mortgage, which, as people are increasingly finding, limit security of occupancy quite painfully.
And yet many people believe that home ownership is particularly valuable because it is a form of wealth accumulation, wealth that will be become a stepping stone to perhaps starting a business or paying for retirement or even just a new car, by virtue of the fact that its likely to go up in value and thus be a good investment, and even if it doesn’t, as one pays off the mortgage one can take out an home equity loan and have funds for other desired purposes. But those are two quite different hopes: benefiting from increases in property values, and being able to take out a home equity loan whether there’s an increase or not.
On home ownership as an investment that will increase in value, accumulating wealth reliably over time: the facts make that hope a shaky one, particularly today, with over four million foreclosures and an estimated 14 million homes “under water,” with mortgages exceeding their declining values. Studies over the long term suggest that’s not just now, but homes have always been “Shaky Palaces,” as one careful study noted, which pointed out that even where losses could be avoided, gains did not compare favorably with investments in other areas, even with conventional savings account. And that should be the real test: will wealth accumulate more rapidly from investment in a home, or in alternatives? The evidence does not support ever-increasing prices of homes, and certainly raises questions as to the desirability of such an investment as an investment over other forms of investment.
But taking out a home equity loan, or holding on to a home over the years as a form of security for one’s old age, do not rely only on speculative value appreciation. As a mortgage is paid off, equity accumulates., and indeed for many that provides a safety net for old age and possible illness. But what is really happening here? Payment on mortgage principal are simply a form of regular savings; as Michael Stone has pointed out, one could easily envisage an arrangement where interest payments on a mortgage remained steadily payable and instead of paying off interest the equivalent amounts were consistently saved, and invested with returns that might well be greater than the slowly declining interest on the mortgage.
The frequently heard statement that “the wealth of most Americans is in the homes they own” is a very deceptive formulation. A home is not usable wealth, not a disposable resource thatcan be usedfor whatever its occupant wants, the way a bank account or a stock certificate or, indeed, a marketable title to someone else’s property is. A home, at least for most people, is what they rely on for shelter, safety, comfort, a place to rest, to eat, to entertain, to enjoy. They have it for its use value, not for its exchange value – or at least need it first and foremost for its use, not for what they could get if they exchanged it for something else, cash or a car or a boat. When you take $400 out of your savings account to buy a refrigerator to use, your usable “wealth” isn’t increased by $400, it’s down by $400; if a rich diabetic pays $5,000 for a dialysis machine on which he has to depend, he isn’t $5,000 richer; if anything, he’s $5,000 poorer, less possible resale value after his death. If someone buys a house for $100,000 with a $90,000 mortgage and a $10,000 down payment from savings, he’s plus $10,000 in equity and down $10,000 in savings, and as he pays off the mortgage principal his equity goes up as his alternative savings go And he can’t use that equity the way he could use the equivalent savings, as an investment in some profit-making enterprise. You don’t” accumulate wealth” by buying a house to live in, except to the extent you’re paying off the principal on the mortgage instead of saving and investing the equivalent amount elsewhere. If there’s any advantage to buying/owning a house rather than a savings account, it’s in the favorable tax treatment payments and profits on sale (if any) get, an unwarranted distortion of a progressive income tax system.
So treat housing as something that is to be used to meet critical human needs, not something to be bought and sold speculatively for the profit its limited supply might produce on a sale, or for the forced savings it requires at the cost of alternative investments. Limited equity ownership, mutual housing associations, etc., are a way of providing such non-speculative housing.
July 9, 2010
 The unfortunately widely purveyed view of Hernando de Soto in a developing world context. Se, among other discussions, Marcuse, Peter. 2004. “Comment on Donald A. Krueckeberg’s ‘The lessons of John Locke or Hernando de Soto: What if Your Dreams come True?” Housing Policy Debate, vol. 15, No. 1, pp. 39-49. Available at: http://www.fanniemaefoundation.org/programs/hpd/v15i1-index.shtml.
 See Elliott Sclar and Matthew Edel, Shaky Palaces, a multi-year study of home prices in the Boston area.
 In Stone, Michael. “Alternatives to the Mortgage Trap: Household Savings and the Mutual Housing Association.” In Progressive Planning No.182, Winter 2010, pp. 22-25.
 See Peter Dreier and John Atlas’ several writings on the millionare’s tax deduction.”