How to tell if one has made it in America? See if they own a home. For decades, homeownership has been one of the cornerstones of the American dream, and the U.S. housing market was the envy of the world. But that’s changed.
The federal mortgage subsidy complex, which turned (white) America into a nation of homeowners in the postwar decades and helped build the world’s largest middle class, is no longer doing what it’s supposed to. Faced with stagnating wages and ballooning property prices, fewer Americans can afford to buy their own homes. The mortgage interest deduction and Fannie Mae and Freddie Mac are turning into regressive subsidies, channeling taxpayer money to rich homeowners and driving up housing costs while a growing group of middle-income renters must fend for themselves. Rent-stabilization laws have become weaker over time. And New York is dealing with a crumbling public housing infrastructure.
“I wish it were triage,” NYCHA head Shola Olatoye told the New York Times in 2014. “It’s beyond triage.”
If the American dream is all about using homeownership to give more citizens a crack at the country’s wealth, that dream is drowning. What can save it?
It’s worth looking to other countries for solutions. This may be a hard concept to stomach: Pride aside, there’s always been the argument that the U.S. is just so different that foreign concepts won’t work here. Here’s the thing though: this country has successfully adopted foreign models in the past. It can do so again.
The German model: embrace the rent
There are two ways to respond to falling U.S. homeownership rates. Either you try to get them up again (more on that below), or you embrace the trend. And why not? There’s no economic law that says real property is always the best investment. In fact, there’s an argument to be made that most Americans would be better off renting and putting their savings into stocks or bonds. That, at least, is the German model.
At 51.9 percent (as of 2015), Germany has one of the lowest homeownership rates among developed countries, according to Eurostat. Forty percent of German households live in private-sector rental apartments, according to a recent report by the Institute for Public Policy Research. There’s a reason: tenant-protection laws are a lot stronger than in other countries. Landlords are required to keep rents flat for the first year of a lease and can raise them by no more than 20 percent over a three-year period thereafter. Evictions are virtually impossible unless the tenant fails to pay rent or the landlord wants to move into the apartment herself.
In the U.S., one of the main incentives to buy is the uncertainty associated with renting: you can be kicked out at a month’s notice, and the rent can leap from one year to the next. In Germany, the median tenancy is 11 years (as of 2010) and the “tenant’s position is very close to a property right,” according to economist Jonathan Fitzsimons. Why buy if you can just stay in your rental forever?
In the U.S. “If you rent, you’re looked down on,” said Michael McKee of advocacy group TenantsPAC. But as more Americans resign themselves to renting, that sentiment becomes harder to justify. Germany’s model of a tenant-friendly rental market could conceivably work well in the U.S., in part because some of its features already exist here. New York, for example, had a vaguely similar system of rent stabilization until the 1990s and Alameda’s city council recently passed a “just-cause” bill to protect tenants from evictions. “I don’t buy the argument that only people who own their own homes are responsible citizens,” McKee said.
The common knock against stronger tenant-protection laws is that it can make it harder for landlords to make money, which could discourage new construction and create a housing shortage. But Germany found a way to avoid that by keeping rent caps fairly flexible. And when it passed a so-called rent brake for the country’s largest cities in 2015, which caps the rent for new leases at 10 percent above a neighborhood’s median rent and limits three-year increases to 15 percent, it excluded new developments. This helps explain why housing in Germany is still highly affordable: a mere 23 percent of renting households pay more than 40 percent of their income in rent, compared to 33 percent in Britain, according to the IPPR study. In the U.S., 48 percent of renting households pay more than 30 percent of their income on housing and 25 percent pay more than 50 percent, according to 2015 data collected by Harvard’s Joint Center for Housing Studies.
Low homeownership rates and a well-regulated rental market have also helped keep German home prices fairly stable over the past decades and help the country avoid the foreclosure crisis that hit other countries a decade ago.
The Singaporean model: American Dream, supercharged
The U.S. could also bet the farm on homeownership, and the most extreme role model of that is Singapore. Its homeownership rate is an astounding 90 percent, thanks to a government entity called Housing Development Board. Founded in 1960, HDB owns the vast majority of land in the city state and used much of it to build public housing. Most public apartments are sold off to citizens in the form of 99-year leaseholds, subsidized by a government fund that employees and employers contribute to (not unlike a 401K). Means-tested government grants go to low-income buyers, who pay about two-thirds less than what they would in private markets. Once Singaporeans own a unit, they can choose to resell it. HDB home prices in Singapore “were remarkably resilient and continued to increase while private housing prices fell” during the 2008 financial crisis, according to a 2016 paper by the Asian Development Bank Institute.
In a sense, Singapore achieved what the U.S. attempted to: building a country of homeowners. Joseph Stiglitz, an economist at Columbia University, cited the homeownership program as one of the ways in which Singapore offers “lessons for an unequal America.”
It’s clear the HDB model would not fly in the U.S., given its aversion to public ownership of anything and the legal challenges of eminent domain. But it offers lessons on how to improve housing policy here. One is to cap benefits like the mortgage-interest deduction and Fannie/Freddie backed mortgages at a certain income level to make sure subsidies go to those actually in need. Another is to rethink the purpose of public housing.
“The Singapore model is based on a premise that deep public investment in housing is going to support a country’s economy and create a sense of belonging” among citizens, said Solomon Greene, a senior fellow at the Urban Institute. In Singapore, public housing is seen as a tool for wealth creation. In the U.S., it’s a crutch. “Maybe there is a role for expanded government support for affordable housing to promote economic development,” Greene added.
Most U.S. public housing programs peg rental payments to income, meaning residents face rent hikes or even the threat of losing their units if they rise up the ladder. And the danger of losing benefits once they move out of their unit is a powerful disincentive to move to new cities in search of jobs, which hurts the economy.
So why not grant public housing residents ownership of their apartments and give them the choice over whether to stay, sell or lease out? Perhaps the biggest argument against the model is that it creates a wealth lottery: those lucky enough to be in a public housing unit suddenly own an apartment, while everyone else would be shit out of luck. But public housing is already a benefit lottery anyway, and at the very least this would be an argument in favor of building more public housing.
The best approach for the U.S. might be to combine the two. Couple German tenant protection and rent-stabilization laws (while learning from the country’s failure to strictly enforce the rules) with the Singaporean way of using public housing as a wealth-redistribution tool. And why stop there? Chile, for example, offers a 5-year flat-rate housing voucher program to young families with household heads aged 18 to 30 who are trying to find a financial footing. In the U.S., this happens to be the demographic struggling most with the sober reality of the new housing market.
Looking to countries that have got it right might help the U.S. tackle its own crisis. But step one will be accepting the idea that it’s okay to rent.