Renting Up

I think it's clear enough that this rise in the number of people renting their homes has, in practice, been driven by economic hardship. And hardship, obviously, is a bad thing. But at the same time, I think the habit of using the homeownership rate as a general indicator of economic progress is a bad one. There are pros and cons to owning versus renting, plus at any given time in any given market the financial imperatives may point in one way or another.

Given all that, it seems that there's no reason for our policy and rhetoric to include a strong bias in favor of homeownership. Renting gives people more flexibility about where they live, which is probably a good thing in a continent-sized economy where there can be a lot of localized booms and busts. What's more, a house you own combines two elements -- a consumption good element and a savings element. Renting separates that out -- you rent as much house as you feel like consuming, and then you save money by buying mutual funds or whatever. When people own they tend to wind up living inside they mutual fund, which means buying a bigger house than they might have rented, which distorts energy consumption patterns and all kinds of other things.

Consequently, I think that over the long term we should try to shift toward policies -- especially tax policies -- that are more neutral between buying and renting. This can probably be accomplished by capping the home mortgage interest tax deduction at some inoffensively high number, and then not raising the cap as inflation eats it away. Lots of people would still own homes if we did that, but it would be somewhat fewer people, and they'd probably own somewhat smaller homes, and national savings could then be more focused on potentially production investments.

Comments

I think the big impact that taxes have is that when you own property and rent it out, you pay income taxes on the rent. When you own a house and "rent it to yourself," no income tax on whatever rents the house would otherwise command. So I think the tax change would have to be something like, income from real estate isn't taxed... I'm not sure that's a good idea, but I think it would make renting more viable.

Posted by minderbender | June 21, 2008 4:49 PM

The real problem is that the savings of the tax break becomes embedded in the price of the house. The tax breaks are included in calculations of how much house you can afford. Thus, houses are more expensive to buy, and the government is foregoing revenue.

People have very strange attitudes about their mortgage deductions as well. A co-worker was whining about her hard-earned money going to support "lazy" people. I pointed out that her mortgage deduction matched the average food stamps payout. She seriously began to froth. "I EARNED my mortgage deduction by working hard and saving. The government should reward people who work hard to buy a house."

I moved her onto the dingbat list, but I think this attitude is fairly widespread.

Posted by Mary R | June 21, 2008 5:04 PM

Every ten years or so a commission does a study that concludes that the mortgage interest deduction is a bad policy. Then, various real estate interests (builder, realtors) complain that economic disaster would ensue if it were ended. What really needs to happen is it has to be phased out over 25 years or so to minimize the impact. While we're at it we could do away with the multiple $250k gain exemption every time you sell a home (or else give me an similar exemption every time I sell a stock investment for a gain..).

Posted by Tom | June 21, 2008 5:10 PM

This blogger reckons differently.

http://bannedindc.wordpress.com/2008/06/21/tenants-extra/

Posted by Roy Berman | June 21, 2008 5:11 PM

FWIW, I changed from owner to renter to cash in the equity on my house and use it to generate income for my retirement. I think you're going to see more boomers do that in coming years - at least those who built some equity in their homes.

Posted by allbetsareoff | June 21, 2008 5:20 PM

A big motivator for many to rent, is that the housing market is expected to continue its decline. Many people, who could otherwise afford a home (and would like one as well), see postponing purchase as the only sensible financial decision. Until the real estate market stabilizes, I don't think the statistics will be a reliable indicator for this issue.

Posted by bigTom | June 21, 2008 5:34 PM

We do currently cap the MID at $1M interest on and have left it there for awhile. At least here in Los Angles, you can imagine inflation making that seem small in a decade.

Posted by Dan | June 21, 2008 5:43 PM

Thanks atrios !

Posted by matt | June 21, 2008 5:55 PM

Thanks atrios !

Posted by matt | June 21, 2008 5:55 PM

"Given all that, it seems that there's no reason for our policy and rhetoric to include a strong bias in favor of homeownership...."

Here's 2 good reasons: campaign contributions from NAR, and campaign contributions from NAHB. And now, the same link I posted earlier today:

http://market-ticker.denninger.net/

Read it - it'll make you puke. Our Congress hard at work on housing policy.

Posted by kafka | June 21, 2008 6:13 PM

The only thing that hasn't gone up in the last 5 years is my rent. I'm not sure why but it would near impossible for men to come up with a manageable down payment on a house. I've owned and I've rented. Renting just fits better right now.

Posted by judson | June 21, 2008 6:14 PM

I'm renting, but it continues to bug me that I have to pay an extra renter's tax because I'm not wealthy enough to buy.

Posted by Elliot Reed | June 21, 2008 6:27 PM

Fair enough, but I think that your use of the word neutral> is a) misleading (a "neutral" government policy doesn't exist for many issues; government decisions affect the issue in too many ways) and b) a weasel word.

You mean "I think that over the long term we should try to shift toward policies -- especially tax policies -- that are more favorable towards renting and less favorable towards owning". So say it.

Posted by Allan | June 21, 2008 6:39 PM

"which means buying a bigger house than they might have rented, which distorts energy consumption patterns and all kinds of other things."

This is wrong.

The cost of a house (esp in metro areas) is primarily the cost of the land underneath. Tax policy has not encouraged people to have bigger houses, cheap commodity and energy prices have enabled people to satisfy personal preferences.

And people stretch the limit on what house they can afford primarily to upgrade the school district their kids are in.

Posted by Kolohe | June 21, 2008 6:49 PM

Renting separates that out -- you rent as much house as you feel like consuming, and then you save money by buying mutual funds or whatever.[Emphasis added]

But Americans don't save. The purchase of a house forces people to put money in some investment vehicle. The fact that Americans like to buy big houses is based on consumer culture. If they didn't buy big houses, they'd be spending the money elsewhere.

Posted by ben | June 21, 2008 7:11 PM

“I pray a lot and hope to heck we’ll win the Lotto,” she said."

That's the last line of linked NY Times article. Someone who expects God and/or the lottery to help her buy a home is someone who should not buy a home.

Posted by becky | June 21, 2008 7:43 PM

I agree with Barney Frank on this--home ownership was pushed too hard as the housing market went into a bubble. A lot of those people should have been renting. There's nothing wrong with renting--not just for affording a downpayment, but if you don't want to be stuck with a house you can't sell when you need to move. Some people get through that by paying two mortgages--not an option for many.

To Kohole's point, while school districts are part of it, the idea that you can turn the house around for an automatic profit paid into the conviction that "really you should get something bigger, so that 10%/year increase in value is on a bigger base." For that matter, in a bubble the top of the market is often going up even faster. (A friend was appalled 2 years ago when a builder was explaining to her how you can't lose with a negative mortgage (pays less than interest, so you owe more than you initially borrowed--e.g. in 2 years your $500,000 loan is $550,000) Which in a market that only goes up by large amounts can work out okay, and I'm sure there were plenty who followed the builder's advice--he himself had.)

Posted by Deborah | June 21, 2008 9:24 PM

The main reason I support homeownership bias is because of the complete lack of enforceable, realistic renter protections in most states in the union and the gigantic incentives for landlords to cheat, bilk and otherwise rip off renters. Banks and mortgage companies, even during the see-no-evil Bush administration, were much more highly regulated and documented. This is a power question, not a financial question. Not yet.

Posted by Jason | June 21, 2008 10:11 PM

Tax policy clearly has pushed people into buying more home than they otherwise would buy.

One strong reason to own a home is that it provides a piggybank when one retires, especially given how tattered the social safety net is in this country.

Posted by MattD | June 21, 2008 10:56 PM

Who would own all the houses people are renting then?

Less homeowners, more landlords? Is that it?

Posted by Herb | June 21, 2008 11:11 PM

Every few months you push this renting is good thing homeownership is bad. It's just one plank of your platform based on how things look to single urban twenty-something professionals.

Renting sucks. I rented for years and it sucked. You have no control over one of the most basic of your needs: shelter. I can tell you all kinds of stories about landlords (and roommates) I've had but keep on renting and I'm sure you'll have some of your own. And that part about you rent and then invest this other money that you have laying around in a retirement account? When you rent you are investing in your landlord's retirement account. Any other money you have left over can go into yours. It makes no sense economically, eve if the mortgage deduction we eliminated. I get like a $3000 buck deduction. It saves me maybe $200.

Renters also undermine neighborhoods. They are there temporarily. How long are you going to live in that blog house, Matt? Going to raise you kids there? I'm going to raise my kids here, which means I'm literally invested in this neighborhood. It is in my interest to cultivate relationships with my neighbors and the schools my kid will go to. I'm going to go to the school board meetings, the city council meetings where they decide what happens in the neighborhood. Renters don't do that. They are moving on. Homeownership creates neighborhoods, interested citizens, stability. It is almost a requirement for a middle class which is history has shown necessary for the kind of democratic urban society that we currently have.

I don't knwo if the mortgage deduction is a good thing or a bad thing, but long term renting is for serfs and share croppers and people in their 20s.

Posted by cw | June 22, 2008 12:47 AM

Every few months you push this renting is good thing homeownership is bad. It's just one plank of your platform based on how things look to single urban twenty-something professionals.

Renting sucks. I rented for years and it sucked. You have no control over one of the most basic of your needs: shelter. I can tell you all kinds of stories about landlords (and roommates) I've had but keep on renting and I'm sure you'll have some of your own. And that part about you rent and then invest this other money that you have laying around in a retirement account? When you rent you are investing in your landlord's retirement account. Any other money you have left over can go into yours. It makes no sense economically, eve if the mortgage deduction we eliminated. I get like a $3000 buck deduction. It saves me maybe $200.

Renters also undermine neighborhoods. They are there temporarily. How long are you going to live in that blog house, Matt? Going to raise you kids there? I'm going to raise my kids here, which means I'm literally invested in this neighborhood. It is in my interest to cultivate relationships with my neighbors and the schools my kid will go to. I'm going to go to the school board meetings, the city council meetings where they decide what happens in the neighborhood. Renters don't do that. They are moving on. Homeownership creates neighborhoods, interested citizens, stability. It is almost a requirement for a middle class which is history has shown necessary for the kind of democratic urban society that we currently have.

I don't knwo if the mortgage deduction is a good thing or a bad thing, but long term renting is for serfs and share croppers and people in their 20s.

Posted by cw | June 22, 2008 12:47 AM

Every few months you push this renting is good thing homeownership is bad. It's just one plank of your platform based on how things look to single urban twenty-something professionals.

Renting sucks. I rented for years and it sucked. You have no control over one of the most basic of your needs: shelter. I can tell you all kinds of stories about landlords (and roommates) I've had but keep on renting and I'm sure you'll have some of your own. And that part about you rent and then invest this other money that you have laying around in a retirement account? When you rent you are investing in your landlord's retirement account. Any other money you have left over can go into yours. It makes no sense economically, eve if the mortgage deduction we eliminated. I get like a $3000 buck deduction. It saves me maybe $200.

Renters also undermine neighborhoods. They are there temporarily. How long are you going to live in that blog house, Matt? Going to raise you kids there? I'm going to raise my kids here, which means I'm literally invested in this neighborhood. It is in my interest to cultivate relationships with my neighbors and the schools my kid will go to. I'm going to go to the school board meetings, the city council meetings where they decide what happens in the neighborhood. Renters don't do that. They are moving on. Homeownership creates neighborhoods, interested citizens, stability. It is almost a requirement for a middle class which is history has shown necessary for the kind of democratic urban society that we currently have.

I don't knwo if the mortgage deduction is a good thing or a bad thing, but long term renting is for serfs and share croppers and people in their 20s.

Posted by cw | June 22, 2008 12:48 AM

Every few months you push this renting is good thing homeownership is bad. It's just one plank of your platform based on how things look to single urban twenty-something professionals.

Renting sucks. I rented for years and it sucked. You have no control over one of the most basic of your needs: shelter. I can tell you all kinds of stories about landlords (and roommates) I've had but keep on renting and I'm sure you'll have some of your own. And that part about you rent and then invest this other money that you have laying around in a retirement account? When you rent you are investing in your landlord's retirement account. Any other money you have left over can go into yours. It makes no sense economically, eve if the mortgage deduction we eliminated. I get like a $3000 buck deduction. It saves me maybe $200.

Renters also undermine neighborhoods. They are there temporarily. How long are you going to live in that blog house, Matt? Going to raise you kids there? I'm going to raise my kids here, which means I'm literally invested in this neighborhood. It is in my interest to cultivate relationships with my neighbors and the schools my kid will go to. I'm going to go to the school board meetings, the city council meetings where they decide what happens in the neighborhood. Renters don't do that. They are moving on. Homeownership creates neighborhoods, interested citizens, stability. It is almost a requirement for a middle class which is history has shown necessary for the kind of democratic urban society that we currently have.

I don't knwo if the mortgage deduction is a good thing or a bad thing, but long term renting is for serfs and share croppers and people in their 20s.

Posted by cw | June 22, 2008 12:53 AM

cw,
Could you be any more hopelessly middle-class? Most wealthy people in Manhattan, for example, rent, not own (some do live in coops). Stop taking your provincial lifestyle for some sort of norm, please.

Posted by rob | June 22, 2008 2:08 AM

Rob,

I'm gonna call shenanigans on this one: "Most wealthy people in Manhattan, for example, rent, not own."

Who owns the properties that wealthy people rent? Poor people?

Trick question. The answer is: "Even wealthier people."

In either model (renters versus homeowners), someone is still going to own all those properties. With more homeowners, that ownership is dispersed widely. With more renters, it's concentrated in a few wealthy, powerful hands.

Call it the Clear Channelization of the mortgage market.... Good idea!

Posted by Herb | June 22, 2008 4:07 AM

To me, the most perverse aspect of the mortgage interest deduction has been the lack of any required connection to the act of home-buying. Even if you assume it's good policy to subsidize home-buying (and I remain unconvinced), why in the world should I get tax deductible interest for a home equity loan just because I happen to be able to afford a house, especially when there's no requirement that I use the proceeds for home improvement. Maybe I "earned" the lower interest rate (compared to a renter using a credit card) through my good credit, etc., but why should the government further subsidize my borrowing money for a new tv, while the renter gets no deduction for the credit card interest? Even more than the regular MID, the home equity aspect is straight-up middle class welfare.

Posted by KT | June 22, 2008 7:50 AM

"Tax policy has not encouraged people to have bigger houses, cheap commodity and energy prices have enabled people to satisfy personal preferences."

But zoning and building codes have indeed forced people into bigger houses, by making it illegal to build small homes. And this is strongly driven by local tax policy: With local governments funded by property taxes, they have a very powerful incentive to warp those zoning and building codes to drive up the property values those taxes are based on.

I'm living in a house three times the size of the one my parents raised our family of five in, and it's absolutely NOT because of my personal preferences, it's because it would have been illegal for me to build anything smaller.

Posted by Brett Bellmore | June 22, 2008 9:17 AM

The MID simply puts the homeowner on the same footing as a corporate landlord. In the absence of the MID, the corporate landlord would have an advantage because it would be able to pass along the MID to renters, making renting cheaper than homeowning. In other words, the alternative to the MID is not cheaper housing, it is renting.

The main tax advantage of housing lies in the fact that housing capital gains are not taxed until you sell. With a mutual fund or cash dividends or interest, you pay taxes yearly or quarterly. Housing lets you use the magic of compound interest to your advantage. As another poster noted, you also avoid paying income taxes by renting, because you enjoy the benefits of the house without paying a corporate income tax (passed on to you by the owner).

Of course, it could be argued that mortgage interest should not be deducted at the corporate level. The same argument could be leveled against three martini lunches and mileage deductions. That leads to Henry George's argument that there should be a land tax, supported by people like Milton Friedman. The problem with that idea is that land is increasingly a smaller and smaller portion of wealth.

Posted by bjk | June 22, 2008 10:57 AM

Housing lets you use the magic of compound interest to your advantage.

So does owning and holding shares.

As another poster noted, you also avoid paying income taxes by renting, because you enjoy the benefits of the house without paying a corporate income tax (passed on to you by the owner).

What makes you think landlords don't pass on all costs -- including that of the corporate income tax -- to their tenants? I'm sure mine does.

In other words, the alternative to the MID is not cheaper housing, it is renting.

Do you have a single cite to back this up? No? I didn't think so, because it's an idiotic idea. The MID almost certainly increases the consumption of housing. In a perfect world, the MID might not have much impact on house prices, because supply would increase. But much of the country faces supply constraints, so a lot of that subsidized demand shows up in the form of extra bathrooms, huge kitchens, high end appliances, and, yes, higher housing costs.

Posted by Toll Brothers | June 22, 2008 12:00 PM

The main reason I support homeownership bias is because of the complete lack of enforceable, realistic renter protections in most states in the union and the gigantic incentives for landlords to cheat, bilk and otherwise rip off renters.

But that's a somewhat problematic argument. The homeownership bias encourages people who shouldn't be landlords to buy up properties. (Those 'make shitloads by buying-to-rent' ads don't occur in a vacuum.)

And the structural problem of the US fiscal bias towards home ownership is that it encourages crappy amateur landlords in the rental sector.

The European model (outside the UK) has its bureaucratic barriers to ownership, but the rental sector is generally less subject to slumlordism. There's a cultural element, sometimes tied to density, but generally related to the idea that life goes on outside the home.

Renters also undermine neighborhoods. They are there temporarily.

In the US, public housing is associated with ghettos, and private renting is associated with short-term living. That's not written in stone (or brick or stucco).

My parents have rented their entire lives. They have lived in their current house for 29 years. My grandparents rented their entire lives. My sister rents because it means her children can have holidays rather than dining on cabbage to make the mortgage payment. Their landlord? The local council.

Homeownership creates neighborhoods, interested citizens, stability.

I'm going to call shenanigans on this one. What has homeownership created over the course of this bubble? The absolute opposite. There is no inherent reason why paying a mortgage as opposed to rent creates any more social coherence; both have to be structured to make it so. And in the US, a host of decisions have been made to encourage mortgage-payers like cw to sneer at the 'sharecroppers'. (And isn't that a term with historical weight?)

Posted by pseudonymous in nc | June 22, 2008 12:32 PM

Here in Western Fairfax County, renting is about 20-50% cheaper for a given house than buying and getting a long term mortgage. (This estimate is based on properties I know well, and includes the mortgage deduction on income taxes.) Rent tends to change only weakly with interest rates, so you would also be spared any ARM spikes.

So, you can save money or get a bigger house by renting. Of course, whether you build any equity with your savings is left up to you that way,

Posted by Marshall | June 22, 2008 1:13 PM

I agree with Barney Frank on this--home ownership was pushed too hard

The problem is that home ownership was pushed too hard for a good reason-- namely that renters were becoming pushed out as their monthly rent spiraled upwards. The only way to avoid this trap of being captive to rents that rose at a rate higher than your income was to lock in your monthly payment by purchasing a home. People renting in cities that saw property values increase got screwed.

Sometimes it's better to rent, and sometimes it's better to buy. However, when the conventional wisdom becomes, "everyone really needs to buy right now or they'll be screwed forever," that probably means it's a bad time to buy.

Unlike mutual funds, mortgages are investments that can be heavily, heavily leveraged. So, yes, you might save money by renting and investing the rest, but by buying with a 10%-20% down payment, small rises in property values can pay off by a factor of 5:1 or 10:1. When homeowners move, they can get a good return on their investment that renters might not have been able to take advantage of if there is a runup in property values.

Posted by Tyro | June 22, 2008 2:35 PM

Toll Brothers,

I should have said that by owning you avoid taxes on the implicit rent.

I agree the probably MID increases investment in housing. But like I said, if you get rid of the individual MID, the corporate MID isn't touched. That puts renting at an advantage to owning, and I don't think anybody supports that.

The MID is not the only subsidy, there is also the deduction for property taxes. That is probably the best place to start if you want to chip away at the favored tax treatment for housing.

Posted by bjk | June 22, 2008 2:55 PM

Tyro makes a great point. The only reason people owning homes stayed afloat until now is that they could leverage their homes while still, somehow, managing to pay debt service and survive the vice squeezing them and the rest of the middle class on down. Without being able to leverage the asset of the home, they'd have gone the way of the low-income renter much earlier -- i.e. for those that try to stay in the city, to the shelter, then to the street. For the rest, to the next suburban ring outward.

Because renting is the obvious alternative, homeownership is both a hedge against rising property values and an investment made in expectation of them. Those who could hedge against rising rents survived not just because they didn't catch the full brunt of gentrification but also because they could leverage their homes to stay afloat until such time as our leaders and policy-makers might throw them a damned life preserver.

I don't think quibbling about class warfare between the lower middle class and the poorest of the poor is the fight of our times. As a practical matter, before we talk about recalibrating mortgage deductions, we need to repair our regressive and destructive tax structure starting at the top. Without that, we don't have the resources to start large-scale affordable housing initiatives that might actually relieve the huge displacement costs being imposed on the folks who were living in the city before we moved there. Absent those major reforms, if we talk about depriving people of one of the few tools they have to try to preserve their livelihoods, we're just sending more working class urban dwellers into poverty or into exile for the sake of us yuppie renters, who are the only ones in the whole scenario who would actually further Matt's policy goal of increasing national savings by putting their surpluses into mutual funds.

Posted by StJoe | June 22, 2008 7:18 PM

I think it's odd to write such a long post about the costs and benefits of renting vs owning and not mention the social benenfits of home ownership. I don't have the citation at hand, but I know they're pretty well documented.

From a personal finance standpoint, owning a home for the long haul (not necessarily the same home, just being a homeowner) is the best thing you can do to get wealthy. Some of that is due to govt policies like the mortgage interest deduction, but not all of it. When you pay rent, you might as well be setting the money on fire. When you own, as long as you have a mortgage you can afford, you write that check every month and you're gaining wealth. Sure, you could save into a mutual fund, but then you're still burning the money you give to your landlord. Also, landlords suck, which is another reason to own if you can.

Posted by too many steves | June 23, 2008 11:31 AM

But like I said, if you get rid of the individual MID, the corporate MID isn't touched. That puts renting at an advantage to owning, and I don't think anybody supports that.

Getting rid of the MID most certainly doesn't "put renting at an advantage to owning." It merely levels the playing field, which now, because of the tax code, subsidizes and favors ownership. Neither ownership nor renting ought to be favored. For some people the former makes sense, for others the latter.

Look, nobody is arguing that there aren't plenty of great reasons to own a home. It's just that there are so many reasons, in fact, that a government tax code subsidy is not needed.

Posted by Toll Brothers | June 23, 2008 2:51 PM

I should point out that while I agree with everything CW said in his annoyingly repeated post, Matt is not single.

Posted by MNPundit | June 23, 2008 4:36 PM