Homeownership is Not a Key to Middleclass Prosperity
It is common to hear the fight against inequality, both economic and racial, framed in terms of increasing home ownership. For example, Cory Booker’s “baby bonds” proposal is a plan to provide every low-income child with a savings account. It cites two allowable uses of money: “homeownership and higher education” which Booker describes as “the kind of human and financial capital investments that change life trajectories.” Or, consider the Urban Institute’s paper on reducing the racial wealth gap in homeownership. Or think about how common it is to hear a politician say that homeownership is a primary means of joining the middle class or to frame racial inequality in terms of disparate rates of homeownership.
But homeownership being unevenly distributed among races is in part a symptom of wider problems. It is part of a trend of racial disparity in all forms of wealth, including housing wealth.
So, why is the housing element of wealth disparity more stressed than, say, the stock or bond element, which is also not equally held by everyone and is disproportionately held by whites? Why does Cory Booker’s plan not allow for the purchase of Viacom shares? Why is nobody asking how to close the racial wealth gap in equity or to view equity as a pathway to the middle class.
After all, research into the subject finds that in America’s post-WW2 history, housing has on average underperformed equity as an investment asset, although the yearly average rates of return on housing are less volatile than the yearly averages for equity. So over time, increasing low income and black investment in equity wealth, not housing wealth, will reduce inequality faster (of course, currently, equity and housing are arguably both in a bubble so over the coming years one might want black and low income people to disinvest from both to reduce inequality).
That said, buying a house on credit through a mortgage will likely earn a higher return on average than housing overall. If an investment in real estate will tend to earn a rate of return higher than mortgage interest, then the homeowner and borrower will earn the difference between the interest on the mortgage and the return on the house; the mortgage acts as a form of leverage.
A similar argument can be made in the context of buying stock with credit. It makes no more sense from the perspective of reducing inequality to incentivize or enable low income or non-white people to take out mortgages to buy houses than it does to incentivize or enable them to open a brokerage account and get approved to borrow from there broker who may hold their stocks as collateral, at least on average. Much like with a mortgage, the only wealth someone can lose from taking out leverage in a brokerage account is the wealth they put forward as collateral, and they do not develop personal debts.
So, why is there a focus on getting poor and non-white people to own their own homes? Well, first there is the obvious desire to find an easy solution to inequality that doesn’t cost middle class white people too much. Additionally, many Americans have an obsession with homeownership on an abstract level. By landmass, America is largely composed of urban sprawl. There is a temptation to judge the lifestyle of an urban renter as inferior. Furthermore, if getting low income and black people a mortgage and a home is seen as a matter of economic justice, it becomes less feasible to rein in predatory mortgage lending or reduce the remit of Fannie Mae and Freddie Mac.
In our country, industries and ways of life are built upon mass producing and filling suburban cul-de-sacs. This is a reinforcing trend as suburban people with cars and their own homes will support infrastructure proposals that fund spending on highways, not on public transport or low-cost public housing. As a result, more people end up with a car and a place in the suburbs. Many other policy choices are part of this self reinforcing cycle of a voter base voting for a government which maintains their way of life. Politicians who recognize their role in this self-reinforcing process find themselves in need of an explanation of why the suburban way of life is good and can’t find any real reason. Instead they resort to baseless assertions like “homeownership is the gateway to the middle class.”