Minority homeownership and wealth-creation
I don’t think it makes a ton of sense to invest in houses right now. They’re overpriced in many areas, they pose much more risk as a homeowner than as a renter – assuming the renter laws are locally strong – and there’s no reason to believe their value will increase faster than inflation in the next few years or decades. When the topic comes up, I urge people to rent.
But it’s hard to say that to people, and minorities in particular, when homeownership is taken as a large part of the American Dream, and especially when the recent financial crisis has been so brutal with respect to black homeownership. Because when someone says “don’t buy a house,” what black people might hear is that only white people will ever own homes in this country, and that is somehow the way things should be. But of course that’s not the point, nor is it the starting point of this discussion.
First, we should remember that historically, the government propped up the mortgage market and deeply inflated housing prices first by giving a tax deduction for mortgage payments and second by creating Fannie and Freddie, which established the existence and (relatively) easy attainability of the 30-year mortgage for many, and moreover kept liquidity high, which eventually led to mortgage-back securities, yadda yadda yadda. But the point is this: the easier it is to get financing, the higher prices get. Look at college tuition. The cheaper the monthly payments are, moreover, the higher prices get.
At the same time, government and government-sanctioned policies kept minorities away from buying good houses and obtaining good mortgages in the post- WWII era, which was by far the best time to buy a house. Then homes just kept getting more and more expensive until the financial crisis.
In other words, homes were set up, by the government, to be a good investment about 50 or 60 years ago. That doesn’t mean they are a good investment now. In fact I don’t think they are. But in the meantime, black people were prevented by and large from taking part in this wealth creation, which is absolutely shameful, but it doesn’t mean that they should now be pushed into buying homes in some vain attempt to get a piece of the wealth-creation action. It’s not only historical, either: even now, wealthy minority neighborhoods have less home value per dollar of income than wealthy white neighborhoods.
Part of the confusion around homes and owning a home is the very definition of homeownership. People seem to think they own a home when they’ve signed a mortgage. But, given that down payments can be small, as little as 3%, the difference between having some cash in a savings account and “owning a home” is small, and not especially in favor of the “homeowner.” It simply means you’ve signed a contract putting you on the spot if the roof leaks, if the basement gets flooded with water or oil, or if the housing market dips. It’s true that you get to live in the house, which is a great and useful thing, but you also get to live in a rented house, and you don’t take on all of those risks.
Let me put it this way. If you bought a pie and only had 3% of the money for it, you wouldn’t really think it was your pie, because your slice is extremely small. Plus if a dog came and ate up the pie, you’d be responsible for rebuilding the pie. It is a lot of responsibility and very little in the way of benefit.
A mortgage is basically a highly leveraged and risky financial instrument for the homeowner. And where before the government could be counted on to allay much of the risk through policy, they’ve run out of way to do that. Or, put it another way: what would the US government have to do to make houses even more expensive. given the affordability crisis we now have? And what’s the likelihood they’ll do that?
There’s one good thing, potentially, about entering a mortgage contract for anyone who does it, namely forced savings. If you’re lucky enough that your roof doesn’t leak too often and your basement doesn’t get flooded too often, and if you got a non-predatory mortgage that you can afford to pay in perpetuity given your salary, so it doesn’t matter too much when the housing market dips, and if you don’t lose your job, then mortgage payments – eventually – start going to principal, and you end up saving money for real, as long as the dips aren’t too bad, and that’s a good thing (as long as you don’t refinance with new mortgages that take money out of your house). But that’s a lot of ifs.
Instead of focusing exclusively on homes, I’d like us to move on and think of other ways to help people save money. Of course this starts with them making enough money to have extra to save.