Home-Owning as a Ponzi Scheme
As the Obama Administration unveils its $75 billion plan today to prevent foreclosures, an urban theorist argues that a nation of renters would be better for America’s future.
In the Atlantic, Richard Florida takes on the sanctity of home ownership by calling decades of housing growth in the Sun Belt and elsewhere a Ponzi scheme:
“To an uncommon degree, the economic boom in these cities was propelled by housing appreciation: as prices rose, more people moved in, seeking inexpensive lifestyles and the opportunity to get in on the real-estate market where it was rising, but still affordable. Local homeowners pumped more and more capital out of their houses as well, taking out home-equity loans and injecting money into the local economy in the form of home improvements and demand for retail goods and low-level services.
“Cities grew, tax coffers filled, spending continued, more people arrived. Yet the boom itself neither followed nor resulted in the development of sustainable, scalable, highly productive industries or services. It was fueled and funded by housing, and housing was its primary product. Whole cities and metro regions became giant Ponzi schemes.”
Now that the housing bubble has burst, Florida advocates “removal of homeownership from its long-privileged place at the center of the U.S. economy. Substantial incentives for homeownership (from tax breaks to artificially low mortgage-interest rates) distort demand, encouraging people to buy bigger houses than they otherwise would. That means less spending on medical technology, or software, or alternative energy—the sectors and products that could drive U.S. growth and exports in the coming years…
“If anything, our government policies should encourage renting, not buying. Homeownership occupies a central place in the American Dream primarily because decades of policy have put it there. A recent study…shows that…homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.”
As provocative as this argument may be, it will meet heavy resistance.
19 Responses to “Home-Owning as a Ponzi Scheme”
National Ponzi Scheme – Recovery.Gov – ARRA – Stimulus Plan -
The $787 billion American Recovery and Reinvestment Act (ARRA) is an extention of the National Debt by $2580 for every man, woman, and child.
Of that, President Obama claims $288 billion is “Tax Relief,” or $944 per person. Then, he claims the “Tax Relief” includes $15 billion for infrastructure and science, $61 billion for “protecting the vulnerable,” $25 billion for education and training, and $22 billion for “Energy.”
So, after all those special tax cut programs are removed, that leaves $165 billion of more general “Tax Relief,” for all of us not in those categories, or $540 per person. So, you are going into debt for investing $2580 for $540 in tax relief.
A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit. Is the ARRA any less of a Ponzi Scheme when the Federal Government does this than when Charles Ponzi or Bernard Madoff does this? Does it matter whether Nicolas Cosmo, Allen Stanford, or Barack Obama does this?
http://theprogressivecapitalist.blogspot.com/
A nation of renters? And who, pray tell, are the landlords for all these renters?
This system has been tried before, you know – a small number of landed gentry and a large number of landless serfs. It ended very badly.
And the landlords rejoice at their new found assets!
> A nation of renters? And who, pray tell, are the landlords for all these renters?
Government(s)! The ultimate arrangement! (Actually, why not syndicates mainly composed of large institutional investors and governments and government officials. Time for that yellow smiley-face button on which to paint Hitler's mustache once again!)
I actually don't believe it has necessarily been on the mind of author Florida, but people like him conceiving of such things with an elitist view of the nation would naturally see themselves as the landlords or at least as homeowners, rather than as renters themselves. It is similar to what I've seen as speculation or who knows, actually a desire, for affluent, highly-educated, “progressive” people and a few token wealthy types of all kinds to pay for all of this to reside on the expensive Northeastern and West Coastal real estate while having a homesteading initiative to get suitable people (guess who) to re-populate (or populate, or remain in) the interior of the country and the continent. (Do angry, resentful hordes stagger out of the interior to the coasts someday, then, to create Silhouette's French Revolution scenario, brought more up to date?)
What's next, I wonder, but “Green Acres” super-yuppies living on the coasts with their farmlands in the interior, broken up into tiny rental “family farms” on which renters, or sharecroppers (will work for housing) will reside and work the land?
And of course, given the concern over hired help and taxes, maybe it's time to bring back indentured servitude combined with the smug confidence of the Eduardian and Victorian eras. Foreclose, and have the homeless work as servants. Hired help, after all, stopped as an industry and is relegated to criminal abuse because it's _so_ expensive. Maybe the UAW folks in Detroit could be our handymen.
Surely nobody believes that the housing bubble we experienced in the past few years is in any way characteristic of the advance and the development of the Sun Belt since World War II and particularly since the 1980s. Just thought I'd take time out for a sanity note. Florida the author is wacky here, in his effort to argue for striking down barriers to increased taxes to pay for the predictable things he wants.
One thing I've thought about is how the length of mortgages keeps getting longer and longer, which keeps prices higher but also creates more interest payments to the banks. It used to be that mortgages were for 5 years, then 10 years…now we're at 30 and 40 is starting to pop up, and I even saw 50 as an option. The “Ponzi” scheme isn't necessarily in home ownership itself, but in using tax and lending policy to keep asset prices rising. I personally would like to see the interest deduction repealed and 15 year mortgages become the norm…because I think it'll create more true ownership (in terms of actual equity) rather than renters in all but name.
[...] Read more here… [...]
A lot of people not only have one mortgage but two mortgages to afford a “bigger” house to keep up with the “Jones's”. And of course many of these same people have to have a nice car to sit in traffic as they drive from the outer suburbs to their offices…. sometimes an hour or hour and a half away…. I understand why it might be seen as a Ponzi scheme, but I wouldn't go that far…. Certainly people did overextend themselves and take advantage of loans that financial institutions made popular (which of course drove financial institutions profits and hefty bonuses)….
Greed is deadly sin.
I'm not so sure I would call it a Ponzi scheme but I do believe the author has a point about the benefits of renting. I believe that encouraging people to buy homes is encouraging them to become badly diversified and highly leveraged real estate investors. You would never take out a loan for $300,000 and put the entire sum in the stock market, yet we do pretty much that when we buy a home with little or no down payment. I've written about this here: http://sovereignmind.wordpress.com/2009/02/06/t…
Besides that, I think the author has a point that home ownership made more sense when people had the same job for the entire lives. Now that people tend to move around from job to job, renting allows us to be a more mobile society. That does not mean, as earlier comments have implied, that the government or just rich folks need to own the land. I've known plenty of landlords that aren't rich. I think it makes sense to separate the investment and the housing aspects of real-estate.
But I don't think that government necessarily needs to step in to make this happen. In fact, I think just getting the government out of the business of promoting home ownership as the key to the American dream will go a long way.
adeline – you started out good, then spun out of control.
If the problem is “encouraging people to buy homes is encouraging them to become badly diversified and highly leveraged real estate investors”, then that holds true for anyone other than the government (not that they are particularly rich these days) or rich people. If the majority or real estate, or even a significant minority, is to be owned by non-occupants, then if you are not the government or rich, you have to be highly leveraged.
If you own multiple properties and are not highly leveraged, then your equity alone makes you 'rich', especially if you are talking about $300k properties (your example). You are just replacing highly leveraged owner-occupants with highly leveraged landlords. If those are my choices, I prefer the former to the latter, myself.
[...] If it’s really a Ponzi or bubble, buyout/buy-in is not the solution, I think. [...]
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Sorry for that last comment. Apparently my kids got a hold of my computer.:)
AustinRoth,
I can only speak for my area, so let's look at some numbers: my home was just appraised for the same amount as it was 2 years ago, but to make it more in line with the average, let's say it lost 5% of its value, which from the numbers I've seen is around the average, especially if you don't count the huge bubble markets like CA. In my area, a starter home is around 150,000, but let's say it's 200,000 just to make things even. Now let's say every home buyer is required (by responsible bank, not necessarily the government) to pay %5 down payment, and no interest-only loans. That would prevent a lot of the upside-down mortgages that cause most of the foreclosures. 5% of 200,000 is 10,000. I wouldn't classify anyone who has 10,000 to invest as rich. Anything less than that is pretty much living month-to-month, in which case I would say yes, they probably shouldn't be taking the risk of investing in real-estate. By the way, I include myself in that. Two years ago I bought a home with no down-payment. I shouldn't have been allowed to, honestly. But, in my defense, the home was appraised for more than I bought it for, which I considered to be the equivalent of a down payment in some sense.
So, it seems to me that higher down payments and more responsible loans would have spared us a lot of the problems we have now. And a lot of the risky loan practices were the result of our society pushing home ownership as the key to the American dream, which as I argue in the post I linked to, I do not believe is true since there are many hidden costs of home ownership, especially in a more mobile society that we live in today.
In addition, the fact that real-estate investment and housing are linked causes the huge problem we have with foreclosures. To the investor, the house is just like any investment. If it goes up, you win. If it goes down you lose. That's the same as any other investment and I'm not going to cry or any investor that loses money. However, if that investor is also the person dwelling in the home, then it is a moral dilemma because not only do they lose their investment, they lose their place to live. No one necessarily needs to be forced to move if a rental property has to be sold by the bank to another investor.
I'm not arguing for all or even mostly rental dwellings. All I'm saying is that we could do with a little less “renting is throwing your money away” mentality.
OK, now you are changing your argument. Your examples were for owner-occupants. I was criticizing the concept of non-wealthy landlords with multiple rental properties, who are not highly leveraged, coming from any ranks other than the rich or government. Nothing you put forth invalidates that position.
Now, as to “I'm not arguing for all or even mostly rental dwellings. All I'm saying is that we could do with a little less “renting is throwing your money away” mentality”, well that is a completely different proposition. It has always been true that renting often makes sense and that is a true tenet of proper real estate investing, but that message was forgotten in a market that seemed to only go up.
That is the problem with any investment vehicle that is only going up – it will stop going up eventually, and the longer and higher the climb, the worse the crash (stimulus and bailouts be damned).
I'm glad we agree then. I don't think I fundamentally changed my argument, but I apologize if I didn't express my viewpoint clear enough the first time. I was never trying to say that people shouldn't be free to choose to own their own home if they can afford to. I was arguing that people who cannot afford to own homes or tolerate the risk of the real-estate market should rent instead (which of course means paying rent to people who can afford to invest in real-estate, who yes are wealthier by definition).
And just to be even clearer, I also arguing that prudent real estate investing says even when you have the capital and and wealth to buy, there are many times you should not, such as, say, an overheated market. The money you spend on rent over even a few years will very likely be significantly less than the capital losses that would be incurred in the coming down market. That is the key lesson I meant that was lost in my earlier post.
The people you are paying rent to may not be wealthier, just stupid.
Agreed on that as well.
[...] Ponzi Scheme. Well, except for that whole thing where your payment ends. [...]