New York Times
By: Josh Barro
May 14, 2014
Some people didn't like my post on housing-as-food, which illustrated how pro-home ownership policies distorted behavior and the economy. The best pro-housing response I've seen (from Megan McArdle, among others) was that homeownership encourages families to save.
This is true. Every month, you write a check to the bank, part of which goes to pay interest, and part of which goes to reduce the balance of your loan. Over time, you own more of the home.
In a country that doesn't save enough, forced saving is a real virtue of owning a home. But investing in home equity can go very badly when home prices fall. Rather than relying on homeownership as a path to retirement saving, can we find a way to replicate the savings benefits of homeownership for renters?
First, we should be clear on why owning a home is useful for saving. It's not because homes are especially good investments. Sure, if you bought a house in 1996 and sold it in 2005, it was probably a great vehicle for building savings. But over the long run, home prices have barely outperformed inflation.
It's not necessarily because owning a home is cheaper than renting a similar home and thus a buyer has more spare income to save. Right now, that is true for most buyers in most markets, because the housing crash pushed prices down much more than it did rents. But the rent-vs.-buy calculation varies with market conditions and personal circumstances. It didn't favor buying in most places in 2006; it may not favor buying now if you don't qualify for a low mortgage rate or aren't sure when you'll move next. Low purchase prices can be a great reason to buy a specific home at a specific time, but they're not a justification for broad pro-homeownership policies or norms. And sometimes, a lower cost for buying is a product of those policies, rather than a justification for them.
But regardless of the investment characteristics of a home itself, a mortgage fosters saving. You make one monthly payment that is part consumption (interest) and part investment (paying off your loan balance) and so you save over time without specifically trying.
This isn't an iron law; during the housing craze, banks offered "pick-a-pay" mortgages that allowed homeowners to decide not to pay principal in a particular month. Renters can conscientiously set aside cash every month on top of their rent payments. In general, however, a traditional mortgage locks you into saving every month unless you refinance or sell, and that provides a powerful nudge toward saving that renters don't receive.
But a home mortgage doesn't have to be the only place people get the saving nudge. Right now, the Obama administration is working with employers on a program called myRA, which would give more workers access to retirement accounts through payroll deductions at work. As an inducement to save, myRA participants will get access to an investment modeled on the "G Fund" from the Thrift Savings Plan for federal employees, which pays an above-market return on a safe, bond-like investment.
Why not also allow landlords to participate in myRA, with tenants able to roll a retirement savings contribution into their rent checks? This could make renters a lot like homeowners: They'd make a monthly payment, part of which would go toward housing consumption and part of which would go toward investment. Over time, they would build equity, but it would be in a stable investment instead of a speculative one.
As with a home mortgage, myRA-for-renters could be structured to require periodic commitments with options for the renter to adjust. Homeowners can refinance; renters could cut their myRA contributions when they renew their leases. But the default setting would be for the contribution to continue, or even increase, as is the case with employment-based retirement plans influenced by the "Save More Tomorrow" ideas of Richard Thaler, the University of Chicago economist.
For the typical home-owning family, nudges toward saving come from three places: Social Security payroll deductions, an employment-based retirement plan and the mortgage. An option to bundle saving into the rent check would offer renters the same three opportunities to save, and help to de-link savings from homeownership -- and Americans' personal fortunes from the residential real estate market.