Journal of Economic Perspectives—Volume 32, Number 1—Winter 2018—Pages 31–58
Homeownership and the American Dream
Laurie S. Goodman and Christopher Mayer
F
or decades, it was taken as a given that an increased homeownership rate
was a desirable goal. In May 1995, President Bill Clinton released the
National Homeownership Strategy (US Department of Housing and Urban
Development 1995), an 87-page, 100-point plan with the goal that it would “boost
homeownership in America to an all-time high by the end of the century.” Presi-
dent George W. Bush framed homeownership as a way to reduce racial inequality,
and in 2003 signed the American Dream Downpayment Initiative to assist first-time
homebuyers with obtaining a down payment (Bush 2003). But after the financial
crises and Great Recession, in which roughly eight million homes were foreclosed
on and about $7 trillion in home equity was erased, economists and policymakers
are re-evaluating the role of homeownership in the American Dream. Many ques-
tion whether the American Dream should really include homeownership or instead
focus more on other aspects of upward mobility, and most acknowledge that home-
ownership is not for everyone.
In this article, we take a detailed look at US homeownership from three different
perspectives. We first take an international perspective comparing US homeowner-
ship rates with those of other nations. The data show that the US homeownership
rate is at the middle to lower end of the range relative to other developed countries.
Si)gie))
■ Laurie S. Goodman is Co-director, Housing Finance Policy Center, Urban Institute,
Washington, DC. Christopher Mayer is the Paul Milstein Professor of Real Estate, Graduate
School of Business, Columbia University, New York, New York, and a Research Associate,
National Bureau of Economic Research, Cambridge, Massachusetts. Their email addresses
are lgoodman@urban.org and cm310@gsb.columbia.edu.
†
For supplementary materials such as appendices, datasets, and author disclosure statements, see the
article page at
https://doi.org/10.1257/jep.32.1.31 doi=10.1257/jep.32.1.31
,32 Journal of Economic Perspectives
Moreover, the US rate is about the same as it was in 1990, while the homeownership
rate has increased substantially in most other developed countries.
We then take a demographic perspective and examine the correlation between
changes in the US homeownership rate between 1985 and 2015 and factors like
age, race/ethnicity, education, family status, and income. The homeownership rate
increased more in 1995 and 2005 and fell more in 2015 than can be explained
by demographics. Part of the run-up in homeownership is likely due to relaxed
credit standards and new mortgage products that expanded the borrower base and
lowered default rates. Subsequently, in the aftermath of the Great Recession, home-
ownership fell with tight credit conditions, problematic student loan debt, stagnant
real incomes, and perhaps a subtle change in attitudes toward homeownership.
Racial and ethnic disparities in home ownership remain pronounced. Homeowner-
ship rates for black households have fallen every decade for the last 30 years, both
unconditionally and after controlling for income and demographics. Even in 2015,
black households with a college education are less likely to own a home than white
households whose head did not graduate from high school.
Finally, we turn to the financial benefits of homeownership. Using national data
since 2002, the internal rate of return to homeownership is quite favorable compared
to alternative investments, even during a period where home prices suffered the
worst shock since the Great Depression. While this result does not depend only on
favorable tax treatment, tax subsidies certainly help increase the financial benefits
of homeownership. Of course, these results vary with the timing of the purchase,
the holding period, and location. Returns to homeownership have been less favor-
able in locations such as Cleveland and Chicago relative to metropolitan areas like
Los Angeles, Dallas, and New York. We then consider other risks and benefits to
homeownership not taken into account in our basic model. Homeownership does
not seem to impair mobility across metropolitan areas during recessions. As well,
homeownership appears to help borrowers accumulate housing and nonhousing
wealth in a variety of ways, with tax advantages, greater financial flexibility due to
secured borrowing, built-in “default” savings with mortgage amortization and nomi-
nally fixed payments, and the potential to lower home maintenance costs through
sweat equity. However, the ability to build wealth through homeownership is depen-
dent on holding on to the home during downturns; lower-income and minority
borrowers are less likely to maintain homeownership through the cycle, and thus
benefit less from homeownership.
Our overall conclusion: homeownership is a valuable institution. On average,
it allows families to build wealth and serves as a measure of financial security.
Homeownership rates in a variety of countries peak for households in their 60s,
suggesting that owning a home helps reduce financial risk in retirement. Moreover,
the mortgage interest deduction is not the main source of these gains; even if it
were removed, homeowners would continue to benefit from a lack of taxation of
imputed rent and capital gains, which are tax benefits available in most countries
around the world. There are very substantial variations in the homeownership expe-
rience, depending on factors like purchase timing, holding period, and location.
But while two decades of policies in the 1990s and early 2000s may have put too
, Laurie S. Goodman and Christopher Mayer 33
⑧m.
Table 1
Global Homeownership Rates by Country and Year, 1990–2015
Homeownership rate (percent) Change in homeownership rate
1990 2000 2005 2010 2015 1990–2005 2005–2015 1990–2015
Bulgaria 89.8 96.5 85.4 86.9 82.3 −4.4 −3.1 −7.5
Canada 62.6 65.8 67.1 69.0 67.0 4.5 −0.1 4.4
Czech Republic 38.4 47.0 73.5 78.7 78.0 35.1 4.5 39.6
Denmark 54.5 51.0 66.6 66.6 62.7 12.1 −3.9 8.2
Finland 67.0 61.0 71.8 74.3 72.7 4.8 0.9 5.7
France 54.4 54.8 61.8 62.0 64.1 7.4 2.3 9.7
Germany 37.3 41.3 53.3 53.2 51.9 16.0 −1.4 14.6
Ireland 80.0 78.9 78.2 73.3 70.0 −1.8 −8.2 −10.0
Italy 64.2 69.0 72.8 72.6 72.9 8.6 0.1 8.7
Japan 63.2 64.9 63.1 62.4 64.9 −0.1 1.8 1.6
Mexico 78.4 72.7 71.3 69.8 71.7 −7.1 0.4 −6.7
Singapore 87.5 92.0 91.1 87.2 90.8 3.6 −0.3 3.3
Slovenia 68.0 82.3 83.2 78.1 76.2 15.2 −7.0 8.2
Spain 77.8 82.0 86.3 79.8 78.2 8.5 −8.1 0.4
Sweden 41.0 67.0 68.1 70.8 70.6 27.1 2.5 29.6
Switzerland 31.3 34.6 38.4 44.4 51.3 7.1 12.9 20.0
United Kingdom 65.8 69.1 69.2 65.7 63.5 3.4 −5.7 −2.3
United States 63.9 66.8 68.9 66.9 63.7 4.9 −5.2 −0.3
Average 62.5 66.5 70.6 70.1 69.6 8.1 −1.0 7.1
Notes: Due to differing census and survey years, many figures in the table are from a year or two before
or after the listed year, or the average between two nearby values. Sources for individual countries are
listed in the Data Appendix.
much faith in the benefits of homeownership, the pendulum seems to have swung
too far the other way, and many now may have too little faith in homeownership as
part of the American Dream.
Homeownership around the World
The United States does not rank particularly high among other high-income
countries when it comes to homeownership. Table 1 compares the homeownership
rate from 1990 to 2015 across 18 countries where we have been able to obtain some-
what comparable data over the entire time period. The United States was ranked
tenth in 1990, at the middle of the pack and close to the mean rate. By 2015, the
United States was the fifth-lowest, its homeownership rate of 63.7 percent falling
well below the 18-country average of 69.6 percent. Over the 1990–2015 period, 13
of the 18 countries increased their homeownership rates. The five countries with
declines in homeownership were Bulgaria, Ireland, Mexico, the United Kingdom—
and the United States.
In a broader sample of countries, many of which have missing data for some
of the years in question, the United States homeownership rate in 1990 was slightly
below the median and mean of the 26 countries reporting data. By 2015, the US
, 34 Journal of Economic Perspectives
ranked 35 of 44 countries with reliable data, and was almost 10 percentage points
below the mean homeownership rate of 73.9 percent. In the online appendix Table
A1-1 (available with this paper at http://e-jep.org), we report results that include an
additional 30 countries. We also give a couple of data sources.
By contrast, the age-pattern of homeownership in the United States is similar
to that of other European countries. In most countries, homeownership rates peak
at or near retirement, between ages 65 to 74. Other than Germany, Austria, and the
Netherlands, the homeownership rate at this age peaks between 75 and 90 percent
(it is 80 percent in the United States), well above the rate for younger households.
Home equity for seniors in large European countries exceeds 8 trillion euros in
2013 (compared to over 5 trillion euros in the United States). This pattern suggests
that home equity often plays an important role in retirement savings, although
homeowners often don’t access the equity directly except through the rent-free use
of the property.1
Looking at the reasons behind differences in homeownership across coun-
tries can be difficult. Each country has its own culture, demographics, policies,
housing finance systems, and, in some cases, a past history of political instability
that favors homeownership (Butrica and Mudrazija 2017). Badarinza, Cambell, and
Ramadorai (2016) offer evidence on differences in household balance sheets for
13 countries and a discussion of various institutions such as the mortgage markets
across these countries. The authors point to a linkage between mortgage finance,
pensions, equity participation, and homeownership. While not definitive, countries
like France, Germany, and the Netherlands have both lower-than-average homeown-
ership rates and robust public pensions and private defined-contribution systems.
As well, government tax policy and regulations appear to play an important
role in countries with below-average homeownership rates. For example, consider
the evolution of homeownership in (the former) West Germany and the United
Kingdom (Phillips 2014). Both countries pursued a similar policy of subsidizing
postwar rental construction to rebuild their countries. However, in intervening
years, German policies allowed landlords to raise rents to some extent and thus
finance property maintenance while also providing “protections” for renters. In
the United Kingdom, regulation strongly discouraged private rentals, whereas the
quality of public (rental) housing declined with undermaintenance and obtained
a negative stigma. As well, German banks remained quite conservative in mortgage
lending. The result was that between 1950 and 1990, West German homeownership
rates barely increased from 39 to 42 percent, whereas United Kingdom homeown-
ership rates rose from 30 to 66 percent. Interestingly, anecdotes suggest that many
German households rent their primary residence, but purchase a nearby home to
rent for income (which requires a large down payment but receives generous depre-
ciation benefits). This allows residents to hedge themselves against the potential of
rent increases in a system that provides few tax subsidies to owning a home.2
i
1
For further detail, see Figure A1-2 in the online Appendix as well as Haurin and Moulton (2017).
2
We thank Michael Lea, Deborah Lucas, and Mark Zandi for their helpful comments on the details of
the German housing finance system.
