The home ownership trap

Owning your own home and making it your castle is a key element of the American dream. Or is it? That’s become a more complicated question in recent years, particularly since the crash of 2007 and the bursting of the housing bubble well before that. Obviously the ability to own rather than rent can still be a very advantageous situation… for some people. But the reality is that it’s not the best choice for everyone, particularly if they are already in a tenuous financial situation.

Stan Humphries of Zillow has an editorial at USA Today where he makes the case that home ownership for some lower income Americans who aren’t ready for it not only fails to build security, but actually endangers it. This flies in the face of what he recognizes as the conventional wisdom.

But the limits of this wisdom were tested during the last housing boom, when the homeownership rate was pushed to almost 70% before plummeting as we worked through the bust. The homeownership rate is falling largely because of an inconvenient, truth: While they might feel good, policies aimed at decreasing inequality by increasing homeownership often achieve the opposite.

It’s sometimes easy to forget, but buying a home is a gamble that we will want and be able to continue living in one place for many years. But lower-income Americans sometimes can’t afford that gamble. When circumstances throw these homeowners a curveball — a sick child or loss of a job — they often don’t have the flexibility to both deal with the crisis and keep up with the mortgage.

The results can be even more disastrous when rapid home value declines cause borrowers to slide into negative equity, particularly at the lower end of the market where negative equity is more concentrated. Every time a low-income homeowner writes a check to pay off a home that’s worth less than they paid, their already tenuous financial security takes a hit. They wind up trapped in a home they can’t sell. What was supposed to secure their financial future ends up destroying it.

Stan is covering a lot of different scenarios in a short space here, and I can’t say I agree with every point he’s emphasizing. For example, the idea of decreasing home values which lead owners to a position of negative equity is never a “good thing” but it’s not always a disaster. If you happen to have the advantage of living in an area where you can stay for a significant portion of your life without being forced to relocate, the value of your home to you is often very different from what the market says it’s worth. It’s a home, and as long as you live there and it provides a roof over your head and a place to keep your stuff, then it’s worth whatever you paid for it. A decreased market value still represents a hit to your estate when you try to pass it on, but the value of having a home while you live there is not diminished.

Of course, the author correctly notes that this happy situation doesn’t apply to everyone. If all the jobs in your field dry up where you live and you get into financial trouble, the best option may be for you to relocate to a more thriving part of the nation. But if you are living in a house you own where you owe more than it’s worth, this may lock you out of the option of moving to improve your situation. Then you wind up trapped and having to take a worse job or go on public assistance. That can turn into a downward spiral.

As with most things, the more wealth and opportunity you have, the better off you will be simply by virtue of having more options. This applies to how you first get into the home as well. (One of the real crimes inherent in the system is the way that financial institutions can still get away with the inverse relationship between principal and interest in most mortgage schemes. The way these are rigged, you can make full payments for ten years and have virtually no equity in your house. But that’s a debate for another day.)

Tempting low income, unstable families into mortgages just to “live the American dream” has certainly not turned out to be a favor for many of them. It’s also contributed to the continued depression in the housing market in some areas as foreclosures increase and abandoned homes drive down values. In the end, home ownership is great, but it’s obviously not for everyone and the buyer should be aware of the risks.