The New York Times today presented a “Room for Debate” feature on the declining rate of homeownership, which has declined 6 percentage points from its peak. The debaters include Dean Baker, Elyse Cherry, William E. Spriggs, A. Michele Dickerson and Ed Glaser. Though I have some qualms with Cherry’s prescription of mass principal write-downs for underwater borrowers, the debaters generally offer reasonable takes on the pros and cons of home ownership and the implications of a declining ownership rate.
It is surprising, however, how little attention these reasonable commentators give to the retirement security benefits of homeownership. That oversight is particularly stark in Glaeser’s comments, where he states bluntly that “there is little public benefit in pushing people to own rather than rent homes.”
Consider a simple example where two identical families earning $75,000 annually at 30 years of age are contemplating renting permanently or plunging into homeownership. Say the first choses a permanent rental apartment for 20 percent of their gross income (about $1,250/month) and the other purchases an equivalent house with a similar monthly mortgage payment, although they will have to pay another 10 percent of their income in property taxes, insurance and maintenance expenses. To keep things simple, let’s ignore the tax benefits of homeownership and the opportunity costs of the home buying family’s initial down payment. Furthermore, assume that all rental and ownership costs inflate by 2 percent per year, except of course the homeowners’ mortgage expense, which is fixed for its 30 year amortization period.
Initially, in this simple scenario, the buying family would be paying a housing cost premium of 50 percent to own rather than rent. But since their mortgage costs are fixed, that ownership premium falls steadily, so that by the time they are 60 years old they are paying only a 6 percent monthly premium over their renting counterparts. By the time they are 61, their mortgage is fully amortized (No refinancing! No home equity loans!) and their ownership costs drop to 50 percent of their counterparts’ rental costs.
In nominal dollar terms, at age 65 the renter family will be paying $2,451 in monthly rent while the home-owning family will have total monthly housing costs of just $1,225. That difference will make a huge difference in the retirement welfare of the two families, not to mention the benefit of cost predictability enjoyed by the homeowners.
Of course, many embellishments to this simple model can be made, but the basic conclusion will stand under a wide variety of assumptions. The renters would have to display a great deal of savings discipline over their working lifetimes to generate enough investment income to offset their housing cost disadvantage and be better off overall than the homeowner at retirement age. I haven’t done a lit review of renter/owner savings behavior, but I’ll guess that very few renter families would display such savings discipline.
So, if there is a public benefit that the elderly be securely housed there is a public benefit to encouraging home ownership. If there isn’t a public benefit to homeownership in this sense, is there a public benefit to other retirement security policies, such as Social Security or 401-k tax advantages?