By Robert J. Shiller
Encouraging homeownership has been considered a national goal at least since “Own Your Own Home Day” was introduced in 1920 by various business and civic groups as part of a National Thrift Week. The newly popular word “homeownership” represented a goal and a virtue for every good citizen — to get out of the tenements and into one’s own home. Homeownership was thought to encourage planning, discipline, permanency and community spirit.
In the aftermath of the subprime mortgage crisis, our national commitment to homeownership is sure to be questioned as we consider what to do about Fannie Mae and Freddie Mac, the enterprises that are meant to increase the supply of money available for mortgages and are now under government conservatorship; the Federal Housing Administration, which directly subsidizes homeownership; and the Federal Reserve’s quantitative easing program, which was intended to lower interest rates. For both political and economic reasons, any or all of these encouragements for homeownership — not to mention the mortgage interest deduction — could be sharply curtailed.
Which is why this is a good time to ask a basic question: In today’s world, is it wise for the government to subsidize homeownership?
In answering it, we have to look at the big picture by considering all the presumed advantages of owning a home, including the encouragement of thrift that animated the founders of “Own Your Own Home Day.”
Consider Switzerland, which by several accounts has had one of the lowest rates of homeownership in the developed world. In 2010, only 36.8 percent of Swiss homes housed an owner-occupant; in the United States that same year, the rate was 66.5 percent. Yet Switzerland is doing just fine, with a gross domestic product that is 4 percent higher, per capita, than that of the United States, according to 2011 figures produced at the University of Pennsylvania.
It’s not that the Swiss inherently prefer renting. A 1996 survey asked a sample of Swiss whether, if they could freely choose, they would rather be homeowners or renters. Eighty-three percent said homeowners.
Certainly, many of us have a basic drive to create our own habitats. We enjoy personalizing our living spaces, inside and out. But there are also important practical advantages to renting to consider — especially when asking if government should support or discourage homeownership.
For example, renters are more mobile. That means they are more likely to accept jobs in another city, or even on the other side of a large metropolis. In addition, it’s hardly wise to put all of one’s life savings into a single, highly leveraged investment in a home — as millions of underwater borrowers today can attest.
So why the difference in American and Swiss homeownership rates? According to a 2010 study, “Why Do the Swiss Rent?” by Steven C. Bourassa at the University of Louisville and Martin Hoesli at the University of Geneva, tax policy provides much of the explanation. For example, owner-occupants in Switzerland pay income tax on what is known as the imputed rent they derive from living in their own homes — yes, they pay tax on the rent they could be charging themselves. This imputed rent is estimated by looking at market rents for similar properties.
In the United States, taxation of imputed rent was struck down by the Supreme Court in 1934. (Britain tried such a tax but abandoned it in 1963.) And, given the likely resistance to any new tax, it is highly unlikely that the idea could re-emerge anytime soon, however sensible it might be. But we do have the option of cutting back on government incentives to own rather than rent.
Beyond tax policy, we need to look at landlord-tenant law. Bourassa and Hoesli contend that Switzerland’s law in this area is relatively attractive, compared with those of other countries. In the United States, it is administered by 50 separate states, so treatment of renters is confusing to national economic commentators. The law, of course, should offer congenial ways to resolve disputes between landlords and tenants. But it should also ensure that people’s various concerns about renting — about possible evictions and rent increases, for example, — are handled well.
There was a revolution in American landlord-tenant law in the 1960s and ’70s, focusing on the inequities facing minority groups. But since 1972, there has been no major update of the Uniform Residential Landlord and Tenant Act issued by the National Conference of Commissioners on Uniform State Laws. Perhaps there should be another revolution in this body of law, focused on making renting more rewarding to people of every background and income level.
Last week, it was good to see that one agenda item for the commissioners, meeting in Boston, was to discuss proposals to revise the law to make the rental process work better.
We should also remember that a goal of “Own Your Own Home Day” was to emphasize thrift. And it is still true today that most people don’t save enough. In a 2011 paper, James M. Poterba of MIT, Steven F. Venti of Dartmouth and David A. Wise of Harvard showed that retirement saving in most American households was inadequate and that most households nearing retirement in 2008 had most of their wealth in home equity.
Many people don’t save much unless a regular schedule of mortgage repayment, which builds home equity, enforces it. The 2011 paper argued that the home-equity portion of saving tends to be conserved until very late in life after retirement, thus providing insurance against the risk of living longer than expected.
Thus, encouraging homeownership in the past encouraged better saving plans. And yet the Swiss, without such encouragement, manage to have a high household saving rate. Our national policy needs to take away much of the enormous subsidy to homeownership — but if and when it does so, it will have to find some other way to promote proper saving.
— Robert J. Shiller is Sterling professor of economics at Yale.