The U.S. housing rebound’s dark side

Homeownership needs a rethink.

Erica Alini 0

News broke on Thursday that mortgage-financing giants Fannie Mae and Freddie Mac, the (sort-of) equivalents to Canada’s CMHC, are expected to pay around $60 billion in dividends to the U.S. government by June. Together with higher taxes imposed at the beginning of the year as part the fiscal cliff deal, that’s enough to delay the U.S. deficit hitting its next legislated limit by two or three months, analysts reckon, from July-August to September or even October.

The flow of funds to cash-starved federal coffers is only the latest good news due to rising U.S. housing prices, which are rebuilding America’s middle class wealth, lifting underwater homeowners, bringing much-needed construction jobs to high unemployment areas and seem to confirm that the Fed’s money-printing strategy is working. North of the border, Canadians are cheering on, hoping to latch on to the southern real estate revival as the domestic housing rally powers down.

But the long-awaited bounce-back of U.S. housing prices harbours the risk of America slipping back into policies and patterns of behaviour that should have perhaps been buried along with exotic mortgage practices. On the policy side, as I wrote yesterday, Fannie and Freddie’s return to profit is feeding pressures from private industry groups on Washington to return the two agencies, which were nationalized in 2008 amid vast mortgage losses, to their prior status as shareholder-owned corporations with an implicit government guarantee. Consumer advocates, on the other hand, are pushing for the Obama administration to preserve America’s traditional heavy-handed governmental backing of the mortgage market. In general, the nightmare of the housing crash doesn’t seem to have shaken the collective belief that home ownership should be an integral part of the American Dream.

Ever since the early 20th century, U.S. administrations have touted home ownership as a societal blessing and Americans considered it an essential stepping-stone of every successful life. Owning one’s home, went the narrative, would do anything from improving child school performance to producing better citizens. As George Bush’s Secretary of Housing and Urban Development, Jack Kemp, put it rather emphatically not so long ago, having one’s own home could “save babies, save children, save families and save America” (hat tip to Time Magazine here for its essential 2010 cover story on this).

But the evidence tying home ownership to the benefits customarily attributed to it is shaky. Though the children of home owners normally perform better in school, for example, this may be because home-owning parents are wealthier or because moms and dads who invest in a house are naturally inclined to invest in their offspring as well. Similarly, studies showing that home owners tend to be more engaged in their communities haven’t gone very far in demonstrating that people care for their neighbourhoods because they own a house, rather than decide to buy a house because they want to get involved in their community. It’s the chicken-and-egg problem of those health reports that find, say, that yogurt consumption is associated with skinnier consumers and conclude that swallowing your daily dose of dairy cultures will lead to weight loss. (But it could perfectly well be that health-counscious types have a greater inclination to eat the stuff as Maclean’s Julia Belluz noted).

Admittedly, some of the common wisdom around home ownership’s less desirable effects is equally grounded in dubious evidence. There are theories, for example, that home ownership leads to higher unemployment by hindering labour mobility, but there is little proof that owning a home prevents Americans from moving to where the jobs are—at least in normal times. The latest housing bust did contribute to worsen joblessness as many underwater homeowners agave up work opportunities that would have required them to relocate and sell a home that was worth less than they owed on their mortgage. But that was an extreme case. Historically, America has managed to have relatively high home ownership rates and a remarkably mobile work force.

Still, if all we can say about home ownership is that there is no incontrovertible proof that it does either good or damage, shouldn’t Americans at least re-examine whether it’s really worth sinking some $100 billion-worth of subsidies and tax breaks in pursuit of the long-held national fixation?

Also, it’s high time for America to shed its deep-seated prejudices against non-home owners. Americans hear the word “renters” and they envision miserable inner-city dwellers or students. But that’s not what renting needs to look like. It is the norm in Switzerland, where only 30% of households are owners, and very common in family- and children-obsessed Germany. And the face of renting is rapidly changing in the U.S. too: With low and middle-income salaries continually stagnating and access to credit now restricted, more and more people have given up on home ownership. It’s no longer just city apartments, it’s single-family homes and suburbia as well. Washington might wish to recalibrate its efforts to help Americans secure a decent place to live towards renting.

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.

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