Home Ownership versus Other Investments

Earlier this week, I released a report on which income groups benefit from mortgage-related tax deductions. It has generally been known that higher-income households reap greater tax advantages than lower-income households. Furthermore, studies have found that mortgage deductions do not necessarily increase home ownership. But they are politically popular and not going away anytime soon. Even if one assumes that there are few benefits to them, they are not harmful either, right? It depends.

If buying a home is on a individual or family’s radar screen, they can afford the payments and are not deep in other kinds of debt, it is a no-brainer. Even in a society that is more mobile and transient than ever, establishing roots, ownership and not paying perpetual rent still remains a primary goal, particularly for people who start families. But besides the home being a place to settle, households often include it in their future retirement plans as a source of income – an investment, so to speak. Indeed, according to Investopedia, 47 percent of Americans ages 50 to 70 rely on home equity as a source of retirement income. Presumably, home values increase through the years for a homeowner, who can then take out a reverse mortgage or sell the home and downsize, pocketing some cash in the process.

But the tax deductions associated with home mortgages may skew the investment choices of those who are saving for retirement. Several studies find that home ownership crowds out other investment choices. One study finds that home price risk crowds out stockholdings, particularly for younger and less wealthy households. Another study finds that increases in property values reduce stockholdings among households, while increases in home equity wealth (with no change in property values) increase stockholdings.

Policymakers reward the tilt toward home investment through the tax code by offering mortgage deductions. But that’s not all. Thanks to the Taxpayer Relief Act of 1997, homeowners can downsize by selling their primary home, purchasing a cheaper one and pocketing the capital gains tax-free.

Households are putting a lot of eggs into the home equity basket, which poses some risk for retirement security. What happens if there is another housing crash? Perhaps it’s time to rethink the tax advantages of home ownership.

Comments (3)

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  1. Nicole Night says:

    Home equity is often the reason given to young adults to purchase a home. How interesting that stockholding could possibly be a better financial option!

  2. Anna Shapovalova says:

    Investing in real estate is often considered the safest and most secure option, especially by those who are either not familiar with or not interested in exchanges and trading. It does create the risk of over saturating the market and causing further crashes. The tax breaks are artificially inflating the demand for homes, and we all know that governmental intervention can backfire quite severely.

  3. Devon Herrick says:

    It has been the policy of both Democrat and Republican policymakers to encourage home ownership. A home often costs little more (after taxes) than rent would have cost. For many people, a home that is paid off becomes their primary asset that shelters them in old age, and can be reverse mortgaged for extra living expenses after retirement. At least that’s the way the American dream of home ownership is sold. Home ownership is not for everyone. Homes sometimes lock people into neighborhoods where jobs no longer exist — at least jobs that suit the home owners skillset.

    Policies to encourage home ownership allow people to put down as little as 3% in down payment. That is foolish. Academic studies on foreclosures and house condition verify that low down payment is correlated with poor outcomes. Just consider the cost of routine maintenance for a starter home in a lower middle-class neighborhood. The cost to replace a cedar fence is 3% of the property value in many cases. The cost of a new roof can run 3% to 5% of the house. The cost of replacing the HVAC system is more than 5% of the value sometimes.

    If it’s difficult for someone to scrape up 20% for the down payment then what are they going to do when the roof needs replaced, their fence rots and the HVAC wears out and there’s an economic downturn? What they will probably do is walk away and foist the cost of disposing of the property on taxpayers.

    During the two decade period that I owned my house all the above occurred. Plus, I had to hire a foundation repair company, I had to completely remodel my kitchen and bathrooms. Every door was replaced and the carpet was replaced and replaced again with wood laminate flooring. I’ve calculated that the purchase price I paid was about equal to the cost of upkeep over a couple dozen years.

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