But today, owning a home looks a whole lot more like renting. Fairly few homeowners actually "own" anything. Rather, they have a sizable mortgage, and they pay money to a bank. That's not all that different than paying money to a landlord.

Seriously?

I pay money to a landlord, I get to live in my place.

I pay money to a bank, I am purchasing capital (which I then "own") and also...living in my place.

Smart thoughtful posts like this are what makes Ezra one of only 2 or 3 blogs I check multiple times per day. Thanks!

Home ownership has been one of the surest ways for the average person to build wealth averaging about 6% per year. Slow but sure.

Now would be a good time to get a home while the prices are depressed.

Why liberal "thought" can argue home ownership is bad as you seem to be doing along with the terrible advice in recent past about how saving may not be good for people....is beyond me.

You be the grasshopper....I'll be the ant.

I recently stayed in a suburb of Chicago (needed a cheaper hotel!). But I had a meeting in the Loop at 7:30. Now this was the closest in suburb, had a border with the city. I hit the road at 6:15 am.
I was late for my meeting.
It was almost inconceivable, the traffic. And I couldn't believe most of those people on the road with me were commuting into work and did that every morning.
I love Chicago. It's a great city. But I couldn't love it enough to make that commute-- not just to own a house with a yard. If I lived there, I'd live in the center city and go without a car. Rent probably too. Of course, my kids are grown, so I wouldn't have to worry about school districts. But for anyone who doesn't have kids and wants to live in an urban area, I'm not sure what that house in the 'burbs gives you but trouble and work. Lower crime maybe. (But I bet the Loop is safer than a lot of suburbs.)
And I do own a home in a smaller city. Can't say it's been a great investment, but slightly better than rent. Lots more trouble!

I pay money to a bank, I am purchasing capital (which I then "own") and also...living in my place.

Yes, but a home isn't really like any other asset. It's not even like a car, likely the next largest-ticket item anyone's going to own after a house. You can't easily trade it in for a better model, you can't quickly sell it off for a bike (or an apartment, in this metaphor) when times are tough. It's a huge financial burden that you're pretty well stuck with for years and years. It is unlike any other asset I can think of in that regard.

Also, to expand on Dave's point, landlords nearly everywhere can unilaterally decide not to renew a lease for any reason or no reason at all. They can also decide to renew based on whatever conditions they offer: tripling your rent, moving out of part of the house so the owners can build an apartment for their kids, whatever.

The homeowner who pays a mortgage actually holds title to the house and land, which means the bank can't decide to sell it to someone else or tear the house down and replace it with another structure, even if the bank would make more money doing so.

It is unlike any other asset I can think of in that regard.

Yes, but it's still an asset, and the money you've pumped into it is still capital, unlike money you give to a landlord.

There are many reasons to rent rather than purchasing a home, especially in a recession, especially when you need more liquid assets, etc. etc.

But there is a huge huge difference between giving money to a landlord and giving money to a bank, and it's ridiculous to say homeowners with a mortgage don't actually "own" anything.

In the US can houses be let on FRI terms, or does the landlord have to pay for upkeep of the house? You'd be surprised how much that costs.

Right. One note about homes is that their value is countercyclical, making them quite hard to sell during the periods when you're most likely going to need to sell them quickly. This is, to some degree, true with stocks, too, but it's even truer with homes.

"One note about homes is that their value is countercyclical"

This isn't correct. Home values are cyclical -- they tend to go up when the economy is on the upswing, and down when it is depression.

By the way, Krugman's piece does ignore some important benefits of home ownership. For the individual, you have the forced savings component -- it's essentially social security for home owners (i.e., "contributions" are mandatory, and "withdrawals" are forbidden or at least very difficult).

Home ownership is also good for communities. When someone purchases their home, they've essentially "bought in" to the neighborhood. That means that they have a strong incentive to take care of their property, police the community, etc. This passes a lot of cost off from the government to the individual homeowners -- and it's purely voluntary.

Right. One note about homes is that their value is countercyclical, making them quite hard to sell during the periods when you're most likely going to need to sell them quickly. This is, to some degree, true with stocks, too, but it's even truer with homes

This is one knock against buying a home vs. making another, more liquid investment, but this doesn't address the difference between spending money on rent vs. spending money on a mortgage.

It's better to have pumped 10 years of mortgage payments into a house that is difficult to sell than it is have pumped 10 years of rent to your landlord and not have anything to show for it.

There's a huge difference between paying rent to a landlord and making mortgage payments to a bank.

"(i.e., "contributions" are mandatory, and "withdrawals" are forbidden or at least very difficult)."

Withdrawls are easy - ever heard of home equity loans? That's why alot of people are in trouble now - got loan based on bubble value for auto purchase, etc - can't refinance or sell in depressed market.

Some of what makes homeownership traditionally better than "throwing your money away" by renting is that the ownership premium (difference between PITI v. rent payments for comparable property) wasn't as high as it is now.

That is, all things considered, if it only costs you (say) 30% more to pay your mortgage payment (etc) than it does to rent, you're better off owning, b/c of all the benefits.

But if it costs you 100% or 200% more to own a home than you would pay to rent, sure, you're "throwing money away" with the rent payment, but you're also saving 50% of your housing costs that you can use for other things (savings, living expenses, etc).

I'd say the short answer is: homeownership is good, but it's not the uber-good, to be elevated above all other economic outcomes. That's where we (individuals + government) went wrong.

Posts like this make me feel better about not having bought a few years ago, anyway-- I'm still bitter about missing out on the Awesome Gentrifying Neighborhood that is now way beyond my means (no one was going to lend me five times my gross income to buy, or at least I knew better than to ever go there), but am sick to death of relatives insisting that some stupid little cardboard suburb would be a good investment. The bottom line was, and is, that I don't want to maintain a house in a location I dislike, because I'd resent spending the money. And the truth is that those are the neighborhoods that aren't doing well now, because they're either overbuilt or inconveniently far out, or both.

Really, I think the reason people tend to have more faith in homes as an investment is that they feel like they understand houses & neighborhoods more than stocks. My pick, even though I didn't actually get a house there, was awesome, with one of highest appreciations in the state, and it's holding its value nicely. But I was looking at things other than space for playsets and multiple walk-in-closets, and IME few homebuyers really try to project how an area's going to look in 5-10 years.

I think that economic theory would suggest that there is no long term profit advantage of owning vs. renting. The government subsidizes owning, but ultimately that will make house prices rise by raising demand. As house prices rise due to increased demand, rent prices will fall due to reduced demand. In the long run, their "profits" will be the same.

There are advantages to either buying or renting. Buying can be a kind of forced savings, if the ownere doesn't forego that advantage with second mortgages. Buying can be enjoyable to the owner, but that would be consider a kind of consumption good (which, by the way, will tend to increase the price). There can be a small return to investment risk on homes. But there is one on stocks also.

Renting preserves mobility, which can be good for career moves. And by the way, landlords also largely borrow to buy or build apartments, and this is tax deductible to the owner of rental property. To the extent the market is competitive, this will also be passed on to the renter.

In short, neither prudent home buyer nor equally prudent renter should expect to have earned more profits, or even own more capital at the end of the investment time horizon.

"The column reads like Krugman didn't really have time to discuss the disadvantages of home ownership, but he's absolutely right."

Ezra, I thought it was odd that you didn't follow this up with a post outlining some of the disadvantages of home ownership. The only lines I can really find that even address the subject are:
"In 1970, the average house was 1,400 square feet. In 2004, it was 2,330 square feet. And over that time families got smaller, not bigger...Large homes mean more space, which means building out, creating suburbs, requesting new roads, and all the rest of it." - This doesn't, on face seem like a negative except that I know your distaste for sprawl. No argumentation about it, however.
"...when you sell a stock, you're not homeless. All this makes a home a considerably less liquid purchase than a stock." -ok... but so what?

A post actually discussing the disadvantages to homeownership, rather than alluding to them and rehashing the history of government policy would have been much more interesting.

I still rent, but many of my friends are now homeowners (I'm in my late 20's). I've seen them dump so much money into their property. There are always roofs to repair, decks to varnish, plumbing to fix, etc. etc. They might be building equity, but their mortgage is higher than my rent, and I have practically none of these other upkeep maintenance costs. I just call my landlord when something needs fixing. Much of these savings end up as investments, and all in all, this has worked out well for me, and, I can tell you, I have a lot less stress than my friends who always seem to worry about property taxes, falling values, termites, leaks, etc. So no, I am not building home equity, but I am amassing a decent portfolio, and my stress levels are way lower than any of my friends.

This may change in the future, but for right now, renting seems like the much better option for me.

I pay money to a bank, I am purchasing capital (which I then "own") and also...living in my place.

In the traditional homeownership model, that may be true. However, if you took out a 30-year note with little or no money down, you're not "purchasing capital", you're paying interest and taxes and accumulating next to no equity for many years.

The correct economic analysis is not between the legal incidence of tax breaks between home owner and renter, but the comparison of the various tax subsidies between landlords and homeowners and the resulting economic incidence of those policies. Landlords get a host of deductions including mortgage interest and most indefensibly the 27.5 year depreciation schedule, which bears no resemblance to economic reality. Because part of those subsidies get passed on to renters in cheaper rent, the tax comparisons between owner and renter is less skewed than current blog-wisdom would have it.

One could make the argument for phasing those deductions out to redirect spending and make mortgages and rent more expensive and home purchase prices less so, but that has little to do with own vs. rent.

Yes, but a home isn't really like any other asset. It's not even like a car, likely the next largest-ticket item anyone's going to own after a house. You can't easily trade it in for a better model, you can't quickly sell it off for a bike (or an apartment, in this metaphor) when times are tough. It's a huge financial burden that you're pretty well stuck with for years and years. It is unlike any other asset I can think of in that regard.

This ignores the fact that you MUST rent if you don't buy.

If you choose not to buy a stock, because you need year-to-year liquidity, you can put your money in bonds or a money market account. If you choose not to own, you....rent and get nothing.

The fact that a house is not a very liquid asset is relevant only when considering the investment alternatives "buy house" vs. "buy stocks". It is not particularly relevant to the discussion of buying vs. RENTING. Because, clearly, rent money is even less of a "liquid" investment.

So this comparison is really a decision matrix with four aspects: rent money vs. mortgage payments and the EXCESS of rent money that you spend on a mortgage vs. that same amount you could invest in more liquid assets.

The problem with the Krugman/Klein/Yglesias analysis is that it doesn't go far enough. We must be bold!

Take the charitable deduction, that allows you to deduct dues to a church or synagogue. The loss to the Treasury is huge, a gap that must be made up by others who don't deign to join. And there's the further downside that by increasing your ties to your place of worship, and by encouraging you to build bonds of friendship with fellow congregants, a "lock-in" effect occurs, making it harder to move to another community when jobs disappear.

But that's kid stuff. This married, joint filer stuff has got to go. Again, the level of subsidization is unconscionable. And for those two-career families, the lock-in effect can be murder!

Indeed, it's time for l'audacite, mes amis. If the Democrats can push these issues of equity and efficiency to the front, the scale of the landslide will be breathtaking!

Eric (and Matt), just telling you that the next time I want thoughts on home-ownership, I'll be sure to come knocking on the doors of some unmarried guys in their twenties with no kids.

"The fact that a house is not a very liquid asset is relevant only when considering the investment alternatives "buy house" vs. "buy stocks". It is not particularly relevant to the discussion of buying vs. RENTING. Because, clearly, rent money is even less of a "liquid" investment."

Are you joking? You have no responsibilities to your landlord besides paying your rent until the end of the lease (which is only extremely rarely longer than a year - and you can usually easily get out of a lease before that) and not completely trashing the place. The home owner is on the hook to the bank for a huge pile of money that they can only repay by selling the house (which is a fairly long and expensive procedure even in a strong real estate market). Plenty of renters are on shorter leases or month-to-month. A renter could theoretically move every three months in many places if you wanted. If a renter can't make rent payments, they just tell your landlord that and rent a cheaper place (obviously, it's sometimes difficult to get a cheaper place but that's just as equally true of a mortgage). The renter doesn't need to worry about whether the landlord can re-rent the apartment again - it's not the renter's problem. Meanwhile, if the home owner can't make mortgage payments, they could lose a huge amount of equity (and in a bad real estate market, could be in the position of being in debt to the bank even if the owner sold the house for less than they bought it for). Owners have to keep up maintenance on the place if they want to be able to sell it for a good price. Any unexpected maintenance costs are the owner's problem - whereas the renter doesn't even have regular maintenance expenses. The neighborhood / whole city / entire nation declines? Tragedy for the home owner, no problem for the renter.

The pro-purchase people seem to mostly be repeating "La La La Buying A House! La La La".

Even at 6 percent appreciation, which isn't really in the cards for some years to come (and which certainly ain't true for anyone who bought since 2000 or so and needs to sell now), you've got your taxes, your maintenance, your fixed costs of buying and selling that make homeowners a straight-out loss for at least the first couple years of ownership, and sometimes well past five years.

This is particularly important in the current unsettled economic climate, where there aren't a whole lot of people who can know that they'll have a job in the same state a few years hence.

"OK, kid, I'm going to tell you the one word, the one word that will make you a millionaire some day. You listening? OK, here it is. Diversification."

Remember the poor schmucks from Enron? The ones who had their entire 401(k) invested in the same company where they worked? They lost everything.

Owning a house is like that, although it's been easy to forget because house prices seemed hard-wired on "up". Now, a lot of people are not only financially wiped out, but they have to move, too, at just about the worst psychological moment.

They'd have been happier, I think, if they'd been a little more diversified.

Also, let's make something clear. When you buy the house, you own the house. All the risk -- collapse of financial markets, hurricanes, crummy neighbors -- rests right between your shoulder blades. The bank does not own your house. The bank has lent you money on certain conditions, notably that you give them the right to repossess your house if you do not make the payments, and that they can require you to insure against most common disasters. The bank bears risk, but it's the once in a lifetime zero-probability event we have now, where lots of people go into default at the same time. But compared to the risks borne by the homeowners, it's peanuts.

The bank is no more an owner of your house than your Visa card issuer is an owner of your computer.

Facile classroom economics glosses over this dichotomy because it's too much for the kiddies to handle the first time through.