Housing Market Media Mayhem
As a homeowner, I have a heightened interest the housing market, to which my financial future is closely tied. But it’s not just “the housing market” in the abstract that makes me nervous right now. More than that, its the ways different media spheres are talking about the market that make me shudder.
Given my position, when I ended up reading the eFinanceDirectory article “Rent Vs. Buy Myths That Ruined the Housing Market,” I got a little sad. For reasons I’ll explain later, I’m confident this deeply troubling article will reach millions of people positioned to read uncritically.
First, Don’t Be Wrong
In short, the article is a run-down of five “myths” that, the unnamed author claims, caused the demise of the housing market. Each piece of the argument has problems, but I’ll focus on two:
“Myth #1: Renting is Like Throwing Your Money Away”
The argument here is that renters, unlike homeowners, “pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes, or maintenance fees.” With “the money they save by renting,” they can “invest in stocks, bonds and other vehicles.” This argument—that renters pay less money, all else being equal, than owners—is echoed throughout the piece.
There’s a massive misunderstanding of real estate here, if not of basic capitalist economy. Renters write only one check each month, but it’s a rare landlord who’s not making sure her costs—including mortgage, taxes, insurance, and upkeep—are covered, and indeed that she’s making a profit. If I can rent an apartment for $850 each month, my landlord’s monthly PITI payment is perhaps hundreds of dollars less than that. In other words, landlords, in the interest of making money at their jobs, take a profit.
So, in seeking shelter, my choices are to come up with some initial capital (a noteworthy hurdle, to be sure) for the privilege of building equity with, let’s say, a $550 payment each month. Initially, only a small portion of my payment goes towards the principal of my loan, but out of an $850 rent check, none of it builds equity. Ever. So not only am I spending more for shelter if I’m renting, but I don’t get to keep any of my money. If I am lucky enough to have the choice, then renting is, indeed, throwing my money away (unless I really like my landlord).
“Myth #2: There are Tax Benefits to Owning”
There’s more weird logic here: “Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents.”
The first sentence is true, but what it “essentially means” is that homeowners save “30 cents” on the dollars that they have to spend anyway for shelter. Again, given two equal payments, the renter comes out behind, every time. (And again, the payments, rent and PITI, are never equal.)
But it doesn’t end there: “Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone—including renter—is allowed to take.”
The first sentence is false. Deducting interest has no tax advantage unless the interest combined with all the myriad other deductions one can itemize exceeds the standard deduction. I should note here that I’m a homeowner in Pittsburgh, a city with relatively low property tax, and that I bought when the market last bottomed out, so I pay about as little interest as one can in this country (5.625%).
Despite the insane bargain I’ve got, I’ve itemized my deductions every year since I bought the house, and not once before. In other words, my mortgage interest presents a significant tax advantage, as it would for just about everybody out there.
Beyond Wrong: Myths and Motives
The “Myths” article is worse than just being inaccurate, though. There is, in the end, a particular political agenda advanced in the piece, one that ought not be part of something that projects itself as impartial financial advice. (“Our goal is to provide you non-biased original articles about the housing and mortgage issues that matter to you most,” reads introductory copy on the site’s home page.)
The piece reads, “Potential buyers bought into all sorts of rent vs. buy myths to justify buying houses that they could not afford during the boom.” Placing blame on the buyers make a certain amount of sense, on the face of it: Why didn’t they understand that an adustable-rate mortgage, for example, would come back to bite them?
That’s a valid point. However, holding buyers solely responsible is also a tactic that conservative pundits often use to keep government spending down. Proposed ARM bailouts, for many conservatives, aren’t appropriate use of tax money. If you blame the borrowers, then you don’t have to give them anything. For me, that argument doesn’t hold, as it’s unclear how the history of the situation should have anything to do with economic arguments for and against bailouts. The point is, it’s a popular argument for a conservative position on the mortgage crisis.
(Another article on the site, “The Truth About Home Prices and Mortgage Bailouts,” makes good on this hidden motive, with falsehoods more problematic than in the “Myths” piece.)
There’s an obvious problem with purportedly “unbiased” advice that’s so deeply biased. Notwithstanding that issue, there’s a larger lesson here. As readers, we have to look out for ourselves. I found the “Myths” piece linked to from one of my favorite sites, kottke.org. Though I find absolutely no fault with the site for posting the link, I worry for its visitors, who numbered 600,000 per month two years ago, and who has at least 100,000 subscribers in Google Reader alone.
It’s our human propensity to believe trusted sources—the limits of which can be extreme indeed—that can get us into hot water in situations like this. A site I and many others trust and respect linked to an article that’s misleading, untruthful, and deeply biased. My worry here is that because of our relationship to the site, we might shed our usual skepticism and read a troubling article more favorably than we should. I hate to advocate widespread suspicion, but surely some measure of caution is in order, no matter where we get our reading material.
I hope you send this in to the site where the article is, if there’s a way to do this.
Thanks for the lucid explanation!
Thanks for the comment!
As for sending this in, there’s a wonderful system called TrackBack that automatically tells sites that I’ve linked to them from this article. What they do with that info is of course up to them…
I won’t type long, so if the tone has a bit of sarcasm, please accept it in the tone intended.
As with most meddling of government into economics, usually to “fix” a problem of some relatively short duration, the ‘law of unintended consequences’ takes over and what was a ‘fix’ becomes a ‘right’. This is true of the entire income tax system which the government (usually a liberal government in our history) will create a program to redistribute wealth, which a liberal government sees as it’s right, and the rest of the discussion are band-aids to keep the original program.
The programs you refer to (Schedule A tax reduction measures) were installed by (dare I say liberal congress and administrations) to continue the redistribution. These happened after WWll when the ‘housing boom’ was encouraged. An unintended consequence of those who could not take advantage of these “tax breaks” was to create tax benefits for those who built cheap rental properties. This led to “the projects” in many cities because the government (guess who was dominating the congress) fostered further programs like ‘rent control’ to help those who could not buy. Believing in the short term fix, but not allowing that the economy would grow over time, there were disincentives to the original builders and owners (like rent control at the local level–copied many times, in many cities) to ever maintain and keep up the original properties. –leading to the poor getting poorer in may cases. Unintended Consequences–but sure good vote getters.
A famous saying attributed to Ronald Reagan goes something like-” Beware of the man who shows up, saying I’m from the government and I’m here to help”.
The government (check your history to note which party was running it-nationally and locally in most populous cities) has given us AMT, without fix after nearly 30 years; the estate tax upper limit where the ‘kick-in’ did not change for so long that the Law of Unintended Consequences kicked in again and the major effect is not on the wealthy dead who were being taxed at least twice on their wealth, but on the small businessman and farmer who’s family must sell the assets to pay the taxes (the $600k limit only started to change in this century and is due for a “sunset” in 2011).
The reduction in today’s income tax program was intended to encourage home ownership. It has become a ‘right’ left in after every attempt to change the tax code in the last 40 years. The tax reduction awarded home owners for the property tax has a similar history. There is a “sales tax” deduction that also attempts to ‘redistribute’.
There have been many attempts to redistribute without anticipating consequences. The original Social Security system was never to be as distorted as it is today. The original Medicare system is also a ‘camel’ built by government that was intended to be a ‘horse’.
Enough with typing and history lesson. Happy to discuss the many attempts by a mostly liberal government to pander for votes by incentives that cannot be removed.
I appreciate your long and thoughtful response—and I don’t mind the sarcasm at all!
Anyway, I think there’s no question that, at all stages, whether liberal or conservative, the people that make up the government have pandered for votes, usually with bad consequences. Which is, of course, discouraging.
And I’m not really in a position to address most of what you say about redistribution efforts, except to point out what we both know: that the difference between our views centers primarily around whether redistribution ought to be undertaken.
For me, even if it has never worked well (and by what measure it could be considered to work “well” or “poorly” I leave to economists—who are of course also politically-minded), some form of redistribution ought to be in place. For you, I suspect, even if it worked much better than it does today, no form of redistribution ought to be in place.
Given this difference, the value I see in your comment, primarily, is as a chance to evaluate previous attempts and their failures.
Having said all that, I do want to note my big problem in the article is not with the position that there ought to be no ARM bailouts. In principle, I agree, actually; I was a borrower during the “ARM boom,” if you like, and the consequences couldn’t have been more clear. (Then again, I had a great realtor.) It’s just that I think there may be economic arguments that make bailouts make sense, however apprehensive I am about the moral rationale behind them.
My big problem, instead, is with an article claiming to be “unbiased” on a website claiming, separately, to be “unbiased,” espousing what is in the end a deeply biased agenda.
Thanks again for your comment.