[24 April 2008]
In a recent editorial for the Guardian, CEPR economist Dean Baker makes a point I was struggling to make in this column. Baker does a good job of explaining how irrational, economically speaking, it was for people to jump into the housing market over the past decade.
only an ideologue would view homeownership as an end in itself. One of the reasons that millions of families face foreclosure and/or the loss of their life savings is that the ideologues of homeownership continued to promote homeownership even when it was clear that buying a home would be financially detrimental.
Recognising the risks of homeownership in a bubble wasn’t a matter of rocket science - it was simple arithmetic. The ratio of house sale prices to annual rent soared past 20 to 1 in the bubble markets, approaching 30 to 1 in the most inflated markets.
If a homeowner takes out a 7% mortgage (very low for a subprime buyer), pays 1% of the value in property tax each year, and another 1% for insurance and maintenance, then ownership costs are equal to 9% of the sale price. If the house sells for 20 times its annual rent, then this family is paying 80% more in housing costs as homeowners each year than they would pay as renters. If the house were selling for 25 times the annual rent, then the family would be paying 125% more as homeowners as they would as renters.
And the dropping prices and HELOCs assure that no equity was amassed either.
That all makes for good support for the point I was getting at in the column, which is that the pleasures of ownership are noneconomic, they are ideological and they cost extra, above and beyond what shelter you get out of the deal.