The National Association Of Realtors is at it again. They’ve never seen a social or economic problem that buying a house couldn’t solve. They even have a full time chief economist, Lawrence Yun, whose job it is to regularly churn out statistics proving the benefits of home ownership or arguing for some kind of government benefit for the real estate industry.
In his latest research piece Lawrence jumps on the wealth inequality bandwagon, claiming that lower home ownership rates are leading to worsening wealth inequality in the US. He trumpets the familiar party line and makes a few other points based on what we can confidently assume is solid data:
- “Homeownership plays a pivotal role in the U.S. economy and has historically been one of the primary sources of wealth accumulation for middle class families.”
- “a metro area’s low homeownership rate is associated with greater wealth inequality”
- “wealth distribution is seen as most unequal in metro areas with the lowest homeownership rates”
- “the country has become more unequal as the number of homeowners has fallen while the number of renters has significantly risen”
- “Changes in wealth during this period are especially profound in high cost metro areas that have seen robust price growth”
I completely believe that every one of these statements is true. However, none of this proves Lawrence’s conclusions – that buying is better than renting and that lower home ownership rates are causing greater wealth inequality. The reason is that his conclusions are based upon two fundamentally flawed lines of reasoning. In both cases he’s confusing correlation with causation.
First, the only difference between buying and renting is in the way the housing cost is financed. People who buy their own homes basically use leverage to purchase an asset and contribute additional funds towards the purchase of that asset each month (principal repayment). They are basically required to save money up front and each month after that while the renter is not required to do so. Of course they are going to experience different outcomes! However, if a renter chose to invest the same money that the home buyer invests but in a different financial asset – e.g. stocks and bonds – would the outcome be that different?
Buying may often trump renting but not always. As I often do I’m going to defer to the New York Times rent vs. buy calculator. In a nut shell the faster housing costs are rising, the longer you are going to stay put, and the higher your tax bracket the more favorable buying looks relative to renting. So it’s no wonder that areas with rapid price growth increased the wealth of homeowners by a lot simply because that’s one of the ideal scenarios for buying. If you live in an area where home prices are rising 10% per year then you are absolutely better off buying a home with 5X leverage as opposed to investing in stocks and bonds. But that doesn’t mean that buying is recommended for everyone in every city.
As for the trend in wealth inequality…just because there is a correlation with lower home ownership rates doesn’t mean that lower home ownership rates are creating wealth inequality. In fact, it’s even more likely that the cause and effect are reversed – greater wealth inequality is probably causing more people to rent. After all, people who are wealthier are more financially capable of buying a home. Or maybe there is a third factor that is behind both trends. It’s a huge, and rather strange, leap to assume that changes in the home ownership rate are driving wealth distribution.
The distribution of wealth in the US is dependent upon many variables. It’s pure folly to find a correlation with one variable and then arbitrarily flag it as the primary driver. It’s clear that Lawrence Yun has an agenda. He essentially says at the bottom of the press release that we need more new home construction and more lax lending standards. The only problem is that the last time we had all that, along withe record home ownership rates, it did not end well.
Home ownership is not for everyone. I, myself, rented in Chicago for 12 years before I bought a place 3 years ago. I do not regret renting during that period at all.
#HomeOwnership #RealEstate #Renting
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