U.S homeownership policy only encourages a nation of borrowers, and that’s a bad thing. So argues Mark A. Calabria, writing for the ultra-conservative Cato Institute, in a piece called “The Long Run Decline in Actual Homeownership.”
As it typical with ultra-anything groups, Calabria’s analysis oversimplifies the issue, then argues against that over-simplified version.
At face value, Cato and Calabria have a point, of course: Assuming their data are right, the percentage of Americans who own their homes free and clear has declined since 1890.
But the argument then goes: “Not owning outright = being in debt; and being in debt = bad.” Ergo, U.S. homeowner policy (which is less of a policy than a general goal) is bad.
The primary impact of US homeownership policy has not been to increase homeownership, but to increase debt along with driving up house prices. Not a bad outcome if you’re a mortgage banker or a real estate agent. But not exactly a good deal for home buyers.
Note that Calabria doesn’t back up his statement, “not exactly a good deal for home buyers” without backing it up (other than with the vague idea of “debt = bad”). There’s a reason for that. It isn’t true.
Borrowing money for something isn’t necessarily bad. Borrowing money at exorbitant rates for something trivial — yeah, that’s bad. But running up your Visa bill (at 20% APR) to buy a pair of $500 shoes is very, very different than buying a house at 4%.
First off, property gains in value (unlike shoes). Sure, there are dips, but over the long run value increases. With shoes, eventually you end up with worthless scraps of leather and an unpaid Visa bill. With a home, you end up with, well, a home. Equity.
That simple fact makes borrowing for a home vastly different than borrowing for anything else. Cars, boats, shoes, TVs — they all lose value over time. Not so a home. As Mark Twain wryly observed, land is a good investment because they aren’t making any more of it.
Then there’s the rather simple idea that it often makes financial sense to borrow. Having a mortgage frees up your capital for other investments. Inflation causes rents to increase, but a flat-rate mortgage payment doesn’t. Over time, borrowers have a higher percentage of their income available for everything from better food to better education to better business investments.
When you’re borrowing so you can eventually own an object worth more than you borrowed… well, that can be a smart idea.
Businesses borrow all the time. Smart businesses. That’s the idea of an investment — you borrow the money for sugar, lemon juice, and a couple of wooden crates knowing that it’s an investment in future profits from selling lemonade.
Borrowing isn’t always bad. When you’re borrowing so you can eventually own an object worth more than you borrowed… well, that can be a smart idea.
Then, of course, are the harder-to-quantify points about what home ownership — or “ownership” — means. We all know the stats about lower crime, nicer neighborhoods, better test scores, and so on. People who own tend to do better than renters. And they don’t differentiate between owning outright or via a mortgage.
But none of that makes it into Calabria’s argument; he insists on equating a mortgage with a credit-card bill, completely ignoring the concept of equity.
If if that isn’t enough disingenuity, he then deftly destroys a straw man for effect.
Know what a “straw man” argument is? That’s when you twist your opponent’s words into something absurd, then argue against those words. Calabria does exactly that with this simple statement:
…but helping everyone live in a McMansion hardly seems like a compelling public policy goal.
Somehow he jumped from the general idea of “It would be good for more Americans to own” to “The government wants everyone in McMansions!” It’s not true, of course.
Some people shouldn’t own. Some people should. No one should borrow more than can afford to pay back. But the math and logic of home mortgages are a lot more complex than Cato and Calabria seem to understand.