Over at Richard Green’s blog, he asks the reasonable question: What is the right downpayment for a mortgage? As he notes, letting people borrow based on little to nothing is a stupid idea, though I disagree that borrowers are the major cause of “the nonsense of the past several years.” As he also notes, 25 percent is too high, creating a barrier to entry for people at the margin of home ownership and thus, the potential wealth-building opportunities it can provide.
Note, I said the wealth-building opportunities that home ownership can provide. I am not one of those people who believes that home ownership is a magical dream. Owning a home can tie you down and prevent you from finding better economic opportunities. Owning a pile can mean you are constantly cash-strapped, pouring money into poor-quality house–or, perhaps worse, leaving you with a house you can not maintain well enough for it to hold its value. It’s not clear that in terms of building wealth, home ownership is better than just saving your money.
However, it’s also quite clear that barriers to property acquisition among many ethnic minorities has reinforced the comparative poverty of these groups, and that that disparity has created intergenerational differences which will be very hard to overcome. In affluent white families, mumsy and dadsy hand you your college tuition, hand you their extensive professional networks, and then hand you the $60,000 you need to even put a foot in the door for a decent southern California home. Then they die and leave you their multi-million dollar home in Santa Monica, protected from the evil tax man by Proposition 13. You can then repeat the cycle for your kids. All this pulling oneself up by one’s own bootstraps is exhilarating, isn’t it? Now there’s nothing wrong with this, but it is plenty reinforcing.
With 25 percent down payments in California, in another 20 years, there will be a land-holding class of people in California, a landed gentry of people who get to own homes by virtue of the fact that their parents bought here years ago. That problem is already bad enough now. The rest of us? Forget it, unless you have rich uncles that write you big checks. This is not a California we want, necessarily; I’m getting to the point where living in my beloved southern California is not worth being unable to buy a home here. You get to a point in your life where you’d like to be able to have a back yard.
And it’s not necessarily a great idea to have too many people like me floating around rental markets. By raising the bar to owner-occupancy, you can push people into renting, and where supply is constrained, the people who bear the burden of that are not necessarily cash-wealthy renters like me.
In the aftermath of the bubble, I’ve seen a lot of thinking that strikes me as just as dangerous as home ownership bubble thinking: romanticizing renting. Note in the comments to Richard’s post that somebody asks whether renting is really that much worse than buying.
Many of the “Renting Rah-Rah” thinkers strike me as thinkers who are ensconced within the happy environs of fairly lively rental markets where renters enjoy quite a few protections from bad land lords. I have a friend who is a poverty lawyer in a rural state, however, and fully half her cases, I swear, are against slum lords who refuse to fix anything and, if you so much as even touch whatever is broken, you are fined up the wazoo and forego your damage deposit–even if you hired a qualified person out of your own pocket for the fix and the fix adds value.
Then there a slumlords who loll around and expect sex with you or one of your kids for a $500 break in a rent payment you can’t make. (Yes, this is a real case of hers, where the landlord approached a woman’s 16 year-old son and got him to “help his mother out.” This went on for months before the mother found out about it, as she thought the landlord had kindly slashed the rent because of the housing price collapse. Um, no.)
Then there are landlords who, if you make even the tiniest of scratches on the 10 year-old paint will seize every single cent of the the $5000 damage deposit they extorted out of you, or the landlords who feel entitled to raise your rent by at least $200 a year no matter what is going to on the rental market because they know they can screw you based on the transactions costs of moving.
If you, like me, love animals, forget it. If you, like me, love to garden, forget it. If you, like me, like to paint and fix things, forget it. If you’re going to be a renter outside of the NE US, you better love yourself some shitty carpet because you will never see a hardwood floor again—not until you visit your friends who actually own their homes.
In short, with your rental, everything around you is controlled by somebody else, and some landlords have great ways of helping you remember that. And there’s the little problem that if your landlord decides to sell the place out from under you, you don’t have as many protections as many policy people think you have. Landlords have all sorts of ways of making you miserable enough to move.
In the rush to “fix” home ownership after the bubble, people have largely forgotten that before people went house crazy, owning a home was a stable enough place to put your money and live your life. Nobody expected to become a millionaire from owner-occupied housing. Undergraduates didn’t expect their parents to buy them condos. People didn’t expect to “flip” anything unless they knew what they were doing. First-time buyers didn’t expect 7,000 square feet. People didn’t expect custom-built homes by the time they were 40. It was a place to live and secure, if not booming, investment that you had along with your savings account.
Let’s study before we advocate for renting as the quick fix. It’s not. It wasn’t the quick fix before the bubble, and it isn’t now.
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You might be interested to know that Prop 13 contributes mightily to the unaffordability of California’s housing; I think the argument can be made both for buying and for renting.
Most of what one is paying for in California when one buys a house is not the house itself; it is the land value. Houses do not appreciate; they depreciate, at about 1.5% per year. What rises in value is the land.
So how does one bring down the selling price of land? Simple: increase the taxes on the land value. Instead of paying the seller for value he didn’t create (the community created that value, and low tax bills exacerbate it), one pays the community, in the form of a monthly tax on land value. No tax on the house itself, no taxes on sales, no taxes on wages. The price of housing comes down. The amount one must borrow comes down. (Credit becomes available for purposes like creating jobs, which most homeowners will approve of.) You compensate the seller for the value of the improvements to the land — the house, landscaping, pool, tennis court, anything anyone in the series of owners has added — at their current value. The landscaping might have increased in value as trees and bushes matured, but most of the rest will only be worth what it could cost to construct them today, less allowance for depreciation.
I think the case could be made that rental housing would also be less expensive if California replaced Prop 13 with a tax on land value, for several reasons. First and most obviously, some people who now have no choice but to rent would be able to accumulate a down payment because 20% or 25% of the value of the structure itself is a lot less than 20% or 25% of the house and the land in the absence of land value taxation. That would mean that landlords would be competing with each other to attract tenants, which would likely lower the rents or cause them to offer more amenities, or give up landlording and sell their buildings to those who would prefer to own the home they occupy (single-family housing or condo).
Second, those who own well-located land, and are not already putting it to something approaching its highest and best use, will find that they are no longer being rewarded in higher land prices, and now need to put that land to good use or sell it to someone who will; underused, it doesn’t pay enough to cover the higher carrying costs! Either they’ll develop it, or they’ll sell it to someone who will.
Whoever develops it will be motivated to find out what the market wants: housing for seniors? housing for newlyweds and young people? housing for families? retail venues? offices? Many more human wants and needs will be met.
Are you aware that, despite the fact that California has among the lowest homeownership rates in the US (~55% when the total US was about 69%, which suggests that the rest of the US was around 72%), California’s seniors have a homeownership rate HIGHER than their counterparts in the rest of the US. Thank you Prop 13. Their heirs are very grateful, including those who live in other states where California’s land prices are unimaginable.
I guess I read the situation a little differently. If you look at the sub-prime behavior and the behavior of slumlords, the kind of converge. Peopole screw with you when you are at the end of your rope. It’s not renting, it’s not owning, its poverty.
Buying a home or renting from a slumlord is a false choice. Perhaps one of the distortive effects of our housing finance system and our obsession with subsidizing home ownership is that there is not a good business and financial model for a greater variety of rental options.
Most big-time commercial enterprises don’t own their own stores or offices. They lease them. Do you think Goldman Sachs gets screwed out of their deposit for tacking a Van Halen poster to the wall? When their toilet breaks, do you think the landlord fixes it?
You can get a five-year lease on a car, but rentals typically are a one year lease. Is there any room in the market for something between a one-year lease and a thirty-year mortgage?
Imagine if you could get a five-year lease on a condo and your landlord would allow you to specify improvements, negotiate a cost, amortize that over the next five-year leasea and capitalize the cost of the upgrades into the rent. That’s how commercial office space works.
I suspect that if there were not the distortive effectis of the mortgage interest deduction, upper and middle income renters would drive a harder bargain and get a better deal.