Philip Greenspun (of arsDigita
fame) went home-shopping in Cambridge and was appalled at the
structurally unsound half-house in Central Square that he found for
$1.25 million. Greenspun’s pretty off-base in his assessment of the
neighborhood: “Central Square is a place with pretty high crime rates
(the city owns
much of the housing in the area and fills it up with people they deem
to be jobless and hopeless).”
For one thing, Cambridge doesn’t “fill up” public housing with “jobless
and hopeless” people — most of the folks living in Putnam Gardens
across the street from us are gainfully employed families who just happen to be
poor. For another, Central Square has rapidly gentrified in the last
five years — it’s hardly the same neighborhood I was afraid to walk
around in when I first arrived in 1993. Nonetheless, I’ll agree with
him: the price is outrageous — by comparison, there’s
a very crooked (and I would surmise also unsound) 3-story on Western
Ave near us that’s going for about $250-$350K per floor. Though I
suppose that building’s also across the street from a big smokestack.

Is there a housing bubble? Greenspun concludes “yes,” citing a Morgan Stanley commentary
on the topic. I find the article interesting in its core thesis that
Americans have shifted their monetary savings (which are now almost
non-existent at 0.2%) into asset-based savings, e.g. real estate. Like
all bubbles, over-investment in real estate relies on rational behavior
slathered over unsustainable facts or irrational trends. Most people
point to ludicrously low interest (and therefore mortgage) rates as the
culprit. Personally I’m more bothered by the irrational pressure in
this country to buy property.

Our friends and co-workers are constantly asking when Rachel and I plan to buy
a home. I interpret their concern as, “When are you going to become a
real adult?” and it reminds me quite a bit of the pressure among teens to own a car.
But buying a house, right now, simply isn’t rational when you consider the
fact that the mortgage on a condo comparable to our apartment is far
greater than our current rent — a sure sign of a bubble. Furthermore,
buying a house — even outside a bubble — isn’t as favorable as most advocates of home ownership
would believe:

1. A house or condo is a huge investment in a single, undiversified
   asset. Unless it represents only a fraction (even a large fraction) of
   your total investment portfolio, you’d be putting your savings in
   incredible risk, even with homeowner’s insurance.
2. Home ownership comes with a huge opportunity cost: you could put your downpayment into an equally if not more
   profitable fund with far less risk.
3. The tax breaks for mortgage payments are significant only when
   your income (and tax liability) is significant. Further, for us
   switching to itemized rather than standard deduction would actually
   increase our tax liability, so that difference would count against any
   tax savings the mortgage payment generates.
4. Only a fraction of your monthly mortgage payment goes towards
   “building equity.” Against that, balance the interest on the mortgage,
   insurance, taxes, and upkeep.
5. The hidden costs of home ownership extend beyond taxes, condo
   fees, and maintenance. The sense of permanence that owning a home
   provides encourages profligate spending on household appliances,
   furniture, decoration, etc. while creating a natural disincentive to
   relocation, even when moving would provide access to better or
   higher-paying jobs. Think of all those people who refinanced their
   homes and spent it on renovation: it’s a lot like investing your money
   in Enron stock when Enron stocks comprise your entire 401(k) plan.

All of this isn’t to refute the value of home ownership, just simply
knock it down a few notches from its high (and irrational) position on
the American Dream totem pole.

It’s not like we’re sitting around hoping the bubble bursts, either.
The economic collapse that would result would probably leave us both
unemployed (a substantial portion of my salary is supported by IOLTA,
which relies heavily on home financing for income). But then, we’re also not
eager to have our rental fee catch up with home prices.

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