Thursday, August 9, 2012

How do we look at housing policy? How should we?

When I received an invitation to a housing policy event, it inspired several thoughts.  First, I was glad to see housing getting some attention at all - I haven't heard either of the major presidential candidates mention housing in a while, and it is an important issue that affects every American in one way or another.  Then, I read the invitation closely and wished that the focus was broader. These discussions often focus on two things: the hit to the economy from the housing crisis and the loss of wealth to current homeowners.  These are two interesting and important questions, but "housing" is a much bigger topic.

Housing is the largest asset for many homeowners, but it is not just that: On the negative side of the ledger,    housing costs are often the biggest monthly expense for homeowners and renters of all ages.  Housing is much more complex than a simple calculation of expenditures compared to asset growth for homeowners, and a discussion that focuses on housing as an asset eliminates millions of renters from the discussion. However, adding ongoing costs are only part of the issue. 

Achieving stable homeownership can be a wealth-building activity, but as we have seen, less than ideal mortgage terms can eliminate (and reverse) wealth-building, as can the wrong purchase price, an inability to pay a mortgage on time, or a local housing market with dropping prices. One lesson from the housing crisis is that making someone a homeowner does not automatically guarantee stable wealth-building (this was clear during the strategy discussion on the foreclosure crisis).

If we don't think of homes as solely financial assets, what are they? Homes can also be many things that are only indirectly financial: basic shelter, a connection to the local community, the hub of an individual's transportation network, a place for families to grow and develop, a location for caregiving, a place of sentimental value, a source of pride, a statement of success, a nest egg for future generations, an entry to the middle class, the embodiment of the American Dream.

The complexity goes in multiple directions.  While the reasons above are just a sample of the ones that can influence a decision, those same decisions are potentially constrained by many factors including cost, location, stability of income, a lack of information, a perception of neighbors and neighborhoods, ties to family and friends, cultural barriers, fear, a lack of choices, a push from a real estate agent, and in some cases, outright (and illegal) discrimination.

A home has a financial cost which can vary widely, depending on the situation.  In an ideal world, everyone would be able to find an option that matched their financial situation and their needs. Each person or family would look at the available options and consider the impacts on their transportation costs, community ties, employment opportunities, health outcomes, familial relationships, safety and other factors.  Then that household would look at the available options and find what they need.

If the private market was doing a poor job of meeting a need (say for more low income housing in locations near transit, or more universally designed homes that work for people of all ages) then the non-profit sector and public sector are there as the safety net. Philanthropy, charitable institutions, religious institutions and other mission-driven organizations can step in and meet some of the need through their actions and activities. Finally, public policy can step in and fill the gap - local, state, and federal policies can support certain activities and would use a wide range of tools to ensure that we create a wide range of options to meet the housing needs of all families in the short and  long term.  Bringing the circle to completion, the private sector, (especially non-profits and philanthropy) can pilot and support innovative models that can be expanded and supported by policy actions once they are fully evolved.

As complicated as discussions of the housing market are, focusing on the health of the housing sector and its impact on the regional or national economy is only part of the picture.  If we are to understand why people make the decisions that they do and understand the implications of the policies that we propose, we must understand that housing is different than other assets.  People make decisions based on a range of reasons, often including some of the factors and constraints above (and others). Individual actions can be only explained by looking at the wide picture.

My fear is that if we have conversations that focus on housing as an asset and economic output only, we will make decisions that do not benefit us in the long run.  The focus on raising the homeownership rate of the years before the housing crisis is a prime example.  When many federal policies and well-meaning advocates focused on raising the overall homeownership rate and closing the gap in homeownership and wealth between racial groups, we hit an all-time high in homeownership and the African American homeownership rate.  Unfortunately, the housing market collapsed, and we soon found out that the gains were temporary. According to Pew, the median net wealth of African Americans dropped by more than half between 2005 and 2009 (for Latinos households, it dropped by almost two-thirds.)

Meanwhile, when the foreclosure crisis hit fast growing areas in southern Nevada, Arizona, and other fast-growing suburbs at the edges of metropolitan areas, many of those who bought a house in a "hot" market with the assumption that the rising values would benefit them soon found that bottoming values left them with little choice but foreclosure.  Many lessons can be taken from that experience, but I am most intrigued by the simple ones that wise older relatives taught me long ago, and financial advisors have undoubtedly repeated forever - "never assume that good times will continue forever, and never invest too much in any one thing."  Homeowners in those areas that looked at housing as merely a fast-growing asset soon found themselves with and underwater mortgage, in a house far from work, and a spike in gas prices or a loss of income due to recession spelled disaster for those who did not have a backup plan.  Policymakers aren't the only ones who fail to look at the big picture - sometimes homeowners are guilty of that as well.

With all that said, the housing sector is an important creator of jobs that (for the most part) cannot be outsourced and home values have a huge impact on the assets of homeowners.  Housing finance is a key part of the financial sector, home construction and related industries are important sources for job creation, and housing has traditionally been a great source of wealth creation for many, especially members of minority groups.  This article is not intended to deny any of that or to insinuate that we should ignore those parts of the housing discussion.  Instead, I argue that by focusing on those pieces, we limit our ability to create complete solutions. A focus on homeowners is often politically expedient and economists and financial analysts are comfortable looking at housing as a commodity, economic output and asset. We have a limited ability to discuss and develop policy on complicated issues, and addressing part of the problem is often preferable to ignoring it.

I would love a robust discussion that includes an understanding of why people make the decisions that they do, the implications of those choices for individuals, communities and our society as a whole, the role of policy in creating a "homeownership or bust" mentality for millions of Americans (including those who don't have an option for homeownership that's reasonably sustainable in the long-term) and the many ways that our national housing stock directly and indirectly influences people's lives both now and into the future. I would be thrilled to see policymakers discuss the need for a wide range of housing options to meet our needs now and into the future.  Most importantly, I would be overjoyed if we continued to develop and popularize other ways to build wealth.

If we can create a wide range of rental and homeownership options that meet needs both now and into the future, and if we can develop sustainable wealth-building strategies that include homeownership when it meets those needs over the long term, we will have done a great thing.  I am hopeful that we can move in that direction, but it's not a short-term goal.  We will have to take one step at a time.


  1. Great discussion, Rodney. I live in Canada and our situation is much different, however I agree with you that "housing" is a much bigger topic and there definitely needs to be more focus on the issues related to housing. Personally I like the "rent-to-own" option. This scenario creates a "win win" situation with the buyer and seller and allows someone who might not otherwise have been able to afford a home obtain home ownership. Thanks for your great thoughts.


    1. Thanks for the comment, Mike. Maybe I should look into writing a post about housing similarities and differences between the US and Canada.

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    1. Thanks for the comment. AARP's policy book has more information - go to and look at chapter 9. I also like - good luck.