We’re trapped in a cult of homeownership

Here’s a radical notion: Let’s rethink the cult of homeownership in America.

Why, a sensible person might ask, do we need to do this when millions of homeowners faced foreclosure in the last year alone, and an estimated 15 million more own homes worth less than their mortgages? Clearly, one might conclude, the bloom is already off the homeownership rose.

The answer is simple. Even in the middle of this collapse, when people were asked about their expectations for house price appreciation over the next year, the answers shock. Zillow.com reports that at the end of 2008, with prices falling, 70% of those surveyed said they did not think their house price would decline over the next six months, and more than a quarter expected it to actually increase.

Many people also still rely on outdated measures in deciding whether to buy or rent. For example, they often base the decision to own on how long they will be in a home. But people predictably understate the chance that they will be forced to move because of a job loss, divorce, death of a spouse or disability. Furthermore, the focus of efforts under the federal national stabilization program to deal with foreclosures is to recycle them back into the hands of homeowners or, in the case of small, multi-unit apartment buildings, resident landlord/owners.

We are a country still in the thrall of homeownership.

Nearly a decade ago, a colleague and I edited a book about the promotion of low-income homeownership, with the subtitle “Examining the Unexamined Goal.” Study after study pointed out the risks of homeownership. One used repeat sales data to look at what properties bought from 1982 through 1999 sold for in Boston, Denver, Philadelphia and Chicago. In Chicago -- which never had much price fluctuation, even in 1995, its worst year -- only 9% of houses on the market sold at a loss. But in Boston, which had a larger price correction, 45% of houses sold in 1993 and 1994 sold at a loss. Worse still, 69% of houses in Denver sold in 1988 and 1989 sold at a loss.

In places such as Los Angeles, which was not part of the study but where house prices cycle a great deal, high percentages of owners during periods of decline have had to hand the keys back to their lenders to get out of underwater mortgages, or fork over a lot of cash at the closing table when they sold.

Ironically, to some people, owning may make more sense today than when housing markets were booming. After all, chances are greater now that people will buy at or near the bottom.

But should Americans assume that homeownership is always the right choice?

We should spend as much time thinking about how public policy can encourage intelligent housing choices as we have thinking about how it can encourage intelligent mortgage choices. The choice to own or rent comes first.

Let’s assume that the way to get out from underneath the weight of foreclosures is to not let speculators and homeowners at risk of falling behind again roll the dice.

Let’s instead consider programs that aggregate ownership of properties, especially two- to four-unit ones, in the hands of nonprofits that can rent them out. These small complexes are estimated to account for up to two in five foreclosures. It might make more sense to get these properties into the hands of nonprofits that own many properties, so that a single rental vacancy constitutes the loss of only a small fraction of rental income. By contrast, one vacancy could constitute up to 100% of the rental income needed to make the mortgage payment for a resident/owner of a single small property, making that a less stable investment.

It’s time we make homeownership just one alternative in a more innovative, affordable and broader housing market.