Homeownership Shouldn’t Be the Only Pathway to Financial Security
American politicians—both Republican and Democratic—hold up homeownership as a cornerstone of middle class success. No surprise, then, that U.S. housing policies, from federal tax law to local zoning, tilt the playing field in favor of homeownership. Rather than viewing homeownership as a goal in itself, policymakers should create more pathways to economic opportunity and financial security for both owners and renters.
Homeownership can provide stability, but also comes with risks.
Homeownership offers some financial advantages over renting. Making regular payments on an amortizing mortgage is a “forced savings” mechanism, meaning that homeowners are paying down debt and accumulating equity with each payment. By contrast, rent payments only cover the consumption value of housing and do not accumulate savings.
Owning a home also provides greater stability and predictability of housing expenditures than renting. For the typical U.S. homeowner, monthly housing costs remain stable over many years, while renters face the possibility of housing cost increases each year. Predictable housing expenditures translates into greater housing stability for owners relative to renters.
However, the Great Recession provided a harsh reminder that, like all financial investments, homeownership is risky. Owners may realize large wealth gains over their initial investment, but there are no guarantees against losing wealth. By standard measures of diversification, parking a large share of your wealth in a single piece of real estate is not an optimal investment strategy. Wealth gains from homeownership have been unevenly distributed across U.S. families, by geography and by race. Black and Latino families face higher barriers to homeownership, and suffered greater losses in housing wealth during the Great Recession.
Buying and selling a house comes with substantial costs. Real estate transactions involve multiple intermediaries—real estate agents, mortgage brokers, appraisers, and home inspectors—each of whom charges a fee. While renters can call their property manager or building supervisor to fix a leaky sink or replace broken windows, homeowners must invest their own time and money to maintain their homes.
Three policy approaches to help renters
Considering both the costs and benefits, homeownership should be viewed not as an end goal of public policy, but rather as one possible mechanism to achieve several different policy goals. Instead of focusing on how to move renters into homeownership, we should develop policies that can help both renters and owners achieve the benefits associated with homeownership, while choosing the tenure that best fits their financial situation and living preferences.
- Encourage a diverse housing supply in high-opportunity neighborhoods
Both renters and owners want similar neighborhood amenities: access to jobs and transportation, safe streets, good schools. Too often, local zoning laws restrict the development of apartments in high-opportunity neighborhoods. Many affluent residential areas only allow single-family detached homes, which are the most expensive housing type to purchase or rent. Allowing multifamily buildings by right in all residential areas would substantially increase renters’ access to high-amenity neighborhoods.
- Provide greater housing cost predictability and stability
One disadvantage of renting is uncertainty about the future, both in terms of whether you will be in same place, and how much it will cost. For low-income families, residential instability is largely a function of not having enough income to cover monthly rent. Providing more financial support through expanded housing vouchers or income supplements would help these families.In markets where housing costs rise faster than incomes, even middle-income renters may not be able to absorb rent increases when their leases expire. Expanding the use of multi-year leases with preset rent increases would provide more predictability for both renters and landlords.While federal laws require information disclosure and other regulations to protect new homebuyers, there are no equivalent federal laws to protect renters. Tenant protections must also avoid unintended consequences that harm vulnerable renters.
- Incentivize savings through alternative channels
Homeownership as the default wealth-building mechanism in the U.S. creates challenges for long-term renters, as well as for homeowners in locations with stagnant housing values. Policymakers should develop alternative programs that make use of the best features of homeownership. Designing programs with “nudges” learned from behavioral economics could imitate the “forced savings” mechanism of homeownership.
Stop treating renting as the tenure of last resort
Renting shouldn’t be viewed as the tenure of last resort, but after decades of U.S. political leaders holding up homeownership as the gold standard, it will take changes in rhetoric as well as hard policy to change perspectives on renting. Current policies favoring homeownership are not only unfair to renter households, they fall short of the nation’s capacity for wealth building. A truly progressive political agenda would seek to make renting one’s home—whether for a year or for a lifetime—more financially stable and socially acceptable for middle-class Americans.