Americans were greeted with good news this week: home prices recently saw their biggest gains in seven years, according to a reputable index. It's a sign that the recent housing recovery is going strong, but an existential question underlies the good news: is the American dream of owning your own home economically wise?
Broadly speaking, the housing rebound is good for the economy: it appears to be boosting construction and hiring, along with consumer confidence and spending. There are benefits for owners as well. But experts—including one of the co-creators of that home-price index—are increasingly questioning whether the pros outweigh the cons.
Homeownership has long been a pillar of the American dream. In late 1931, with the Great Depression well underway, President Herbert Hoover summoned a thousand citizens to the nation's capital for a conference aimed at boosting home building and ownership. In the inaugural meeting, he summed up the importance of owning a home to the American psyche:
That our people should live in their own homes is a sentiment deep in the heart of our race and of American life. We know that as yet is not universally possible to all. We know that many of our people must at all times live under other conditions. But they never sing songs about a pile of rent receipts. To own one's own home is a physical expression of individualism, of enterprise, of independence, and of the freedom of spirit. We do not in our imagination attach to a transitory place that expression about a man's home being his castle, no matter what its constitutional rights may be.
In other words, home ownership is good for the American soul, but is it good for its wallet? One of the leading advocates for caution in light of the recent good news has been Robert Shiller, a Yale University economist and co-creator of the Case-Shiller home-price index, which identified the record gain. In op-eds and T.V. appearances, Shiller has repeatedly warned against viewing homes as an investment.
Strong gains from March of last year to March of this year—released in the Tuesday report—may be the result of fewer foreclosure sales, which generally go at discounted rates, he told CNN on Tuesday. Over time, the share of such sales will stabilize, he argues, tempering the price gains. In other words, don't expect a dramatic rebound to endure.
Shiller, who predicted the 2006 housing bubble, argues that over time home values barely appreciate. According to his research, home prices rose just 0.2 percent a year on average from 1890 to 1990. In nominal terms, prices skyrocketed, but when adjusted for inflation they were pretty stagnant. And the Federal Reserve's current policy of promoting inflation may exacerbate that effect. "[B]ecause people often forget to correct for inflation, they may have the illusion that the market is improving," Shiller warned in a New York Times article last month.
Though some disagree with his finding, others have confirmed similar results, albeit in slightly different markets. In a 2009 paper, a group of MIT economists found that commercial property values in Manhattan actually dropped 30 percent in real terms from 1899 to 1999. "[I]n the last century New York real estate has not outpaced inﬂation in terms of appreciation," they concluded.
Homeownership may even be economically harmful: high rates of homeownership in a state are correlated with labor-market declines, British economist Andrew Oswald and Dartmouth economist David Blanchflower found in a preliminary paper.
"A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate," they reported.
High rates of homeownership were aligned with lower labor mobility, longer commutes and fewer new businesses. It wasn't necessarily the case that homeowners themselves are suffering the downsides of ownership, they argued. High rates of ownership have side effects. More homeowners, for example, could translate to stricter zoning laws—thanks to NIMBYism—making it harder for new businesses to form.
Owning a home isn't all bad, of course. As Hoover noted, there's a psychological benefit to having a place of your own. The children of homeowners also have fewer children as teens and stay in school longer, the authors of one study concluded. Owning a home is correlated with being a good citizen, too. And even Shiller himself admits that "there is no single answer to the question of housing's potential as a long-term investment." Buying a home because you want the stability or security is one thing. But, as evidenced by the recent housing bust, buying under the potentially false belief that it's a smart investment could prove devastating.