“For most middle-income Americans, the equity accumulated in their homes is the largest single source of wealth. Homeownership has been marketed as a cornerstone of the American lifestyle, as a source of both individual wealth-building and community stability. But there are substantial downsides – for families and for the nation – to relying on homeownership as the primary strategy for accumulating wealth.”
Key takeaways are:
- A more balanced approach to wealth-building would reconfigure homeownership subsidies to better target first-time homeowners in addition to encouraging other short-term and long-term wealth building strategies.
- The most common approach to financing homes in the US – a fully amortizing, thirty-year fixed-rate mortgage, is a great forced savings mechanism that is one of the most effective ways to combat short-term spending and build wealth over time.
- On the other hand homeownership violates a key rule of finance: diversification. Putting all one’s eggs in one basket is risky, especially since housing prices are not guaranteed (witness the aftermath of the Great Recession).
- Another drawback to homeownership is that it is illiquid, so it is difficult to convert your house into cash if you need to.
- Homeownership is at the root of the racial wealth gap. Despite the Fair Housing Act (FHA) passing in 1968 and allowing explicit racial discrimination in housing, we are still seeing the inequity that traces its roots back to the redlining and discriminatory lending that preceded it.
- Homevoters contribute to toxic politics. NIMBY-ism is in part a product of people wanting to protect their most valuable asset, so they turn out in droves to fight anything that might threaten it.
- Redesign homeownership subsidies to be more effective and more equitable
- Page 92-93 of the book offer some background on proposals that would move incentives away from the current Mortgage Interest Deduction (MID) structure to something that would more effectively enable moderate- and middle-income renters to buy their first home.
- Help all households build short-term liquidity through matched savings accounts. Think 401(k) but for but for building savings; could included matches from employers and could be eligible for preferred tax treatment. Much like MID this would be an incentivized forced-savings product that helps fight the human tendency to spend now.
- Address the racial wealth gap through individual and child development accounts. Similar to the 401(k) idea, but instead of an employer match these could possibly have the Federal government providing a match through a subsidy, and it would be on a sliding scale so that the lower the income of the family the higher the potential subsidy level.
I definitely recommend buying the book so you can get the full benefit of Schuetz’s full analysis of the challenge and detailed solution proposals. You can buy it here.