· Chapter Nine ·

THINK ACCESS, NOT OWNERSHIP

Normal is getting dressed in clothes that you buy for work and driving through traffic in a car that you are still paying for—in order to get to the job you need to pay for the clothes and the car, and the house you leave vacant all day so you can afford to live in it.

—ELLEN GOODMAN

The newfound possibilities in the Gig Economy to access instead of own represent nothing short of a personal financial revolution. It transforms the underlying economics of our lives. The option to rent, not buy, to access, not own, increases our control over how and what we consume, is more flexible, and can save us money. It’s also more convenient and offers more variety. We no longer need to spend large amounts of money or take on significant debt to purchase and own. We can pay less for access on demand and use the difference to save, invest, or buy time. My former student Ben summed it up best:

Many of the things in my life that I previously would have purchased are now borrowed for the short period of time that I have a use for them. I stream music and movies and rent electronic copies of books. I use Hubway to commute to work and rent the apartment in which I live. While I may have been resistant to this idea of limited ownership a few years ago, it has become a part of my daily life and I now embrace it. Renting an item gives much greater flexibility and access while providing a sense of freedom from the clutter and headaches of ownership.

Ownership isn’t dead and it isn’t likely to completely die, but it can be deferred or discretionary in a way that’s unprecedented historically. The Gig Economy gives us options to rent or access cars (Zipcar, Uber), bikes (Hubway, Citi Bike), fully furnished apartments and homes (Airbnb, Onefinestay), clothes (Rent the Runway, Le Tote), jewelry (Haute Vault), and just about anything else. With the ability to access so much so easily, we need to come up with pretty compelling reasons to buy.

There’s even a lifestyle emerging built on the foundation of the access economy. Prerna Gupta, a serial entrepreneur, wrote about her experience living what she calls “the Airbnb lifestyle.”¹ She and her husband lived in several countries over the course of the year, staying in temporary Airbnb housing in every location and carrying all of their possessions in a few suitcases. Her experience made her question the need to return to a traditional home-based life and led to a “palpable change” in her relationship with her possessions. She believes that the Airbnb lifestyle will become more common in part due to the changes in how we work. “Work is becoming much more fluid, and workers have increasing control over when and where they work. This makes them less tied down.” Owning, after all, reduces flexibility.

The ability to access instead of own is not yet equally available. Urban areas offer the greatest opportunity to reduce our levels of ownership, particularly since both transportation and housing, which are the largest expenses in most households, can be more easily accessed (rented) in cities. We can significantly increase our financial flexibility just by turning these two large fixed costs into equal-sized or smaller variable expenses.

This geographic dispersion in the ability to access goods and services is inverting the relative cost of life in the suburbs versus the city. The suburbs, with their high fixed costs, ownership-dominated lifestyle, and limited offerings of on-demand goods and services, start to seem disproportionately expensive. As cities transform into access economies where goods and services are flexible, convenient, and available on demand, they become more attractive to Gig Economy workers on variable, unstable incomes.

Ownership and the Thief of Debt

Perspectives on debt have changed in the Gig Economy. Financial experts used to talk about the differences between “good debt,” such as mortgages and student loans, and “bad debt,” including car loans and credit card balances. This distinction has become less relevant because in the Gig Economy it’s become so much riskier to carry any debt. It’s hard to make the case for committing to high fixed-debt payments in an economy of insecure jobs and variable income.

Whether it’s good or bad, debt always increases your risk, robs you of flexibility, and appropriates your options. It can limit your ability to change jobs, move, start your own business, or take time off. It claims your financial future. In the worst case, debt forces you to build a lifestyle around supporting your payments instead of around your priorities and goals.

America is a highly indebted nation. We regularly take on “bad debt” to buy goods that rapidly depreciate in value. We pay high fees on credit cards and loans to buy cars, consumer goods, jewelry, and clothing, little of which we need, much of which we want, all of which starts losing value as soon as we walk out of the store. But our largest debt doesn’t come from Saturdays at the mall or the car dealership. The biggest sources of debt in the United States arise from taking on the “good debt” of mortgages and student loans.² Let’s look at these further.

The Truth about Home Ownership

The benefits of access over ownership seem clear for consumer goods that we don’t use every day. But how does it work for the very large and very expensive purchase of a home? Does ownership make more sense then? Aren’t mortgages “good debt”?

For many Americans, the decision to buy a home isn’t primarily financial. Instead, it’s based on emotional and personal factors. If where or how we live is high on our list of personal priorities, then we might be willing to incur some financial underperformance to achieve our particular vision of home life. We might want to buy or own, for sentimental reasons, the house that’s been in our family for decades, even if needs a lot of costly work. Not every house-buying decision is a purely financial one, but even then, it still makes sense to clearly understand the financial consequences of those choices.

Evaluated solely as a financial decision, homeownership is a risky investment. Houses are highly leveraged, mostly illiquid, very expensive, and immovable assets. Any objective financial assessment would conclude that it makes sense to hold an asset with those characteristics only as a small percent of a larger, mostly liquid, and lower-risk portfolio. But that’s not what happens in the United States.

Home Ownership Is Killing the Middle Class

Edward Wolff, an economist at New York University, studies wealth distribution and the impact of home ownership of the wealthiest 1 percent of Americans compared to the next 19 percent, which he calls the upper middle class, and the middle 60 percent, which he calls the broad middle class. His results are alarming:³

Nearly two thirds of the wealth of middle class Americans is in their homes: a very highly concentrated and highly risky state of financial affairs. The broad middle class has 63 percent of their net worth (assets minus debt) in their principal residence. In contrast, the upper middle class has a much more diverse portfolio, with a little under one third (28 percent) of their net worth in their homes. The top 1 percent tie up only 9 percent of their net worth in their primary residence.

According to Wolff, both the increasing gap in wealth inequality and the financially fragile state of the middle class stems from their overinvestment in their homes. The overconcentration in housing and the high levels of debt the middle class carry in their homes hurt them badly in the Great Recession and housing crisis of 2008. Wolff looked particularly at the years 2007 to 2013 to assess the impact of these two events and found that they hurt the broad middle class the most: “The sharp fall in median net worth and the rise in overall wealth inequality over these years are traceable primarily to the high leverage of middle-class families and the high share of homes in their portfolio.”

A recent report from the Pew Research Center also concluded that the differences in the percentage of housing that the upper and middle classes hold in their portfolios are increasing the wealth gap. It concluded that “the disparate trends in the wealth of middle-income and upper-income families are due to the fact that housing assumes a greater role in the portfolios of middle-income families.”⁴ The report notes that upper-income families had three times as much wealth as middle-income families in 1983 but ended 2013 with more than seven times as much.

Middle-class Americans are overinvested in housing, and that investment is not paying off. Housing has delivered persistently low rates of return relative to other asset classes like stocks and mutual funds.⁵ The middle class has overinvested in an asset that underperforms. The long-term rate of return (from 1983–2013) for financial assets like stocks has been about 9 percent, compared to the 3.5 percent return on residential real estate over that same time period. During the Great Recession and housing crisis (2007–2010), residential real estate returns fell by about 7 percent, twice as much as financial assets returns, which declined by only 3.7 percent. And real estate has been slow to recover. After the recession, from 2010–2013, residential real estate returned nearly 5 percent, but financial assets have delivered more than double the returns—over 12 percent.

In every economic scenario—long term, crash, and recovery—it’s been better to hold financial assets than residential real estate. Yet the broad middle class holds only 3 percent of its assets in stocks and mutual funds, compared to holding over 60 percent of its net worth in housing. The returns data here is clear: If you’re looking for returns, buy financial assets, not residential real estate.⁶

It’s important to note that these returns data are national averages, but real estate is both local and personal. Even though housing as an asset class has performed poorly, there are pockets of outperformance. Homeowners in parts of Brooklyn, Boston, and San Francisco, for example, have largely seen their properties appreciate. Whether or not those increases outperform the stock market depends on the particular property and many other factors. Home ownership can be a good investment, and some residential real estate does generate attractive returns, but across the United States, those outcomes are the exception, not the norm.

The Three Myths of Home Ownership

If the returns from residential real estate are low and owning too much house in your portfolio is risky, then why is there still such widespread demand to purchase a home? The answer is partly due to the persistent narrative about the financial benefits of home ownership. Many Americans accept the premise of home ownership as the foundation of the American Dream and default to that option without carefully considering the financial risks or evaluating other options.

The U.S. government has gone to great lengths at great cost to encourage home ownership through the mortgage interest deduction, interest deductions on home equity lines of credit, and favorable capital gains tax treatment of the sale of a primary residence. The American Dream narrative and these government policies rely on the unquestioning acceptance of the three common myths of home ownership.

MYTH #1: My home will appreciate in value.

Truth: Maybe, maybe not, depending on general economic conditions, your specific real estate market, the type of house you buy, the condition it’s in, how well you maintain it, and where in the real estate cycle you buy and sell it.

MYTH #2: Owning “builds equity.”

Truth: Relies on Myth #1. Ownership only builds equity if you buy a house that maintains or increases its value. You can make mortgage payments for a decade, but one sharp fall in the real estate market could put you in a position of negative equity, where the home is worth less than the remaining amount you owe on it.

You also only build equity if you hold the house for many years. The early years of mortgages are dominated by interest payments, not principal payments, so you build equity very slowly for more than a decade. If you buy a house through an interest-only loan, you don’t build any equity at all by paying your mortgage.

MYTH #3: I can deduct mortgage interest payments on my taxes.

Truth: The majority of Americans aren’t able to deduct mortgage interest on their taxes. The reason is that the mortgage interest deduction is only applied if you itemize deductions on your tax return, which, according to Tax Policy Center figures, only 30 percent of Americans do.⁷ It only makes sense to itemize if your itemized deductions exceed the standard deduction (which in 2015 was $12,600 for a married couple filing jointly and $6,300 for a single person). For most Americans, the standard deduction will be higher than their itemized deductions, so they won’t itemize. The Tax Policy Center reports that “The mortgage interest deduction (MID) provides the largest benefits in total and as a share of income to upper-middle-income taxpayers.”⁸

The Real Costs of Owning a Home

Data on the mediocre returns from residential real estate may seem counterintuitive because you may have heard people (especially older generations) talk about the low prices they paid for their homes compared to the high prices they would sell for today. Those types of comparisons are flawed because they don’t take into account inflation or incorporate the level of risk the buyer assumed, and they fail to include the total costs of the home.

There are a number of mortgage calculators online to help you assess the total cost of a home. According to the Federal Reserve, the median sales price for new homes sold in the United States at the end of 2015 was $297,000.⁹ For ease of math, let’s look at an example for a $300,000 home, as well as a $500,000 home for comparison. In our example, both have a fixed 30-year mortgage at a 4-percent interest rate, with a 10-percent down payment. At the end of 30 years, assuming you don’t refinance or prepay, the total all-in, out-of-pocket cash costs of your $300,000 house will be $622,121, and the total cost of your $500,000 house will be more than $1 million dollars, or $1,031,867, to be exact.

Wait, what? How can a $500,000 house end up costing over a million dollars? Here’s the math over 30 years (I used the mortgage calculator at mlcalc.com to run these numbers. In the table below, the assumptions I used are in parentheses, so you can rerun the calculation with different numbers).

*In this model, the property tax and insurance remained constant over the life of the mortgage. Therefore, the total home costs displayed here are understated. If we modeled realistic annual increases in taxes and insurance, the total cost would be higher. These figures also don’t include any annual maintenance costs, or any cost of renovations, improvements, or upgrades during the 30 years. If we added these costs in, the total cost would be higher. Finally, these examples don’t include the mortgage interest deduction.

These simplified examples illustrate that the total home cost, even without tax increases or ongoing maintenance or upgrades, is more than double the price the homeowner paid. And this is in a low-interest-rate environment. As recently as the mid-2000s, mortgage rates ranged from five to seven percent, compared to the recent three- to four-percent environment.

But What if I Really Want to Own a Home?

Home ownership is not always a bad financial idea, but for most middle-class Americans it is. The way middle-class Americans purchase houses (with too much debt) and own them (as too large a part of their portfolio), it’s difficult to make a compelling case for home ownership. Many Americans also live in real estate markets with persistently low demand, stagnating or declining prices, and limited activity. When is home ownership a better financial idea? It can make sense if you purchase a house:

With significant equity (a large down payment)

With a small mortgage (meaning you buy smaller or buy later in life, when you’re richer)

As a small percentage of your overall assets and investment portfolio (meaning you buy smaller, later in life, or when you’re richer)

Located in an area with significant demand, like dense, urban, or near-urban areas, gentrifying neighborhoods, or destination locations (not the middle of Random Suburb, USA)

If you buy under these conditions, even if prices decline, you will be better positioned to weather the storm. The lessons from 2008 were clear: Too many Americans owned too much house financed by too much debt in unattractive real estate markets. If you’re going to buy a house, steer clear of those mistakes.

Accessing a Home

There is some evidence that the access economy is growing for residential housing. The most recent research from Harvard’s Joint Center on Housing Studies shows that 37 percent of U.S. households now rent, the highest level since the 1960s.¹⁰ The number of households renting has grown more rapidly over this past decade (2005–2015) than any decade in the past 50 years. Renting has become more prevalent across all age groups, all income levels, and all household types. To evaluate the possibility (and financial impact) of renting, start with online calculators that can give you a preliminary idea of the financial differences between renting and buying both a home and a car.¹¹ Accessing housing instead of owning it might make more sense at various stages in your life.

If renting doesn’t sound appealing, there is a new “Airbnb lifestyle” of accessing housing that might be more interesting. Returning ex-pats Elaine Kuok and David Roberts wrote about the year they spent living “home-free” in Airbnb apartments around New York City to explore a variety of neighborhoods.¹² Their lifestyle offers them flexibility they couldn’t have if they were committed to a year-long lease or a multidecade mortgage. I contacted David on Twitter for an update, and, as of this writing, he and Elaine are enjoying a second year of their home-free lifestyle.

The market for accessing housing is young but is continuing to grow. WeWork, the company that offers coworking space for rent in major cities here and abroad, just launched its first We-Live property in New York City, with month-to-month rentals of fully furnished and decorated apartments. As demand for accessing housing increases, we can expect to see even more options emerge.

Diploma Debt

The second-largest expense Americans have is student loans. Buying an education and “owning” a diploma is expensive. Student loans have long been considered good debt because an investment in a college education pays off. Studies and statistics consistently show that college graduates earn more than non–college graduates over their lifetimes, which offers the most compelling support for the argument that college is an investment worth borrowing for.¹³

What’s missing from the studies is the list of implicit assumptions that a strong case for borrowing must include: whether you attend a quality school, if you get a job after college (the unemployment and underemployment rates among college graduates are historically high¹⁴), and whether you earn a reasonable income relative to your debt levels (many graduates don’t and name student loan repayments as their biggest expense, even above rent). Only when those conditions are met is there a strong argument for suggesting that taking out student loans is a sensible financial decision.

The Risk of Diploma Debt

Student loans might be “good debt,” but they’re also risky debt. The student loan lenders such as Sallie Mae used to take on meaningful repayment risk, as lenders normally should and do, but that risk has been mitigated by regulations that limit their exposure to defaults. For example, if the borrower falls behind in payments, government-backed student loan lenders have the right to garnish wages with just 30 days’ notice and without a court order.¹⁵ Contrary to popular opinion, student loans can be discharged through bankruptcy proceedings but only through a separate adversary proceeding. Only 0.1 percent of people with student debt apply for the proceeding when they file for bankruptcy.¹⁶ The colleges themselves take no risk because their tuition is paid in advance each semester. That leaves the borrower as the only risk-taker in the student loan transaction.

Dealing with Diploma Debt

If you’ve already taken on student loan debt, then your choices for dealing with it are limited. You can refinance it to a lower interest rate, defer it, forbear it, apply for reduced payments, consolidate it, or spend the time and energy to pay it down as quickly as possible and move on with your life. How far down the road of fiscal parsimony you’re willing to go to rid yourself of student loan debt depends on your goals and priorities and your tolerance for financial sacrifice. There are now numerous websites and blogs of graduates sharing their experiences and techniques for rapidly (usually in under a year) paying down their student loan debt. Joe Mihalic’s website No More Harvard Debt is perhaps one of the better-known examples.¹⁷

On his site, Joe chronicled his quest to pay down $90,000 of business school debt in 10 months. He not only achieved this goal, he exceeded it. Joe was able to pay down his debt ahead of schedule, in just seven months, by cutting expenses, taking on side gigs, and selling and renting his stuff. Many of you will consider Joe’s approach to be extreme, and it is, but it was also an effective and short-term strategy. If you feel as strongly about one of your own big, audacious goals, whether it’s debt repayment or some other ambition, you might relate to being ferociously committed to accomplishing it and understand the willingness to do whatever it takes.

In an unexpected turn of events, there are early signs that employers are stepping in to relieve some of the financial burden of student loan debt. In 2016, companies like Fidelity, PricewaterhouseCoopers, and Natixis have piloted or introduced student loan repayment benefits in which they pay a fixed amount per year (at Fidelity it’s $2,000) toward an employee’s student loan balance.¹⁸ Until it becomes much easier and more common to access credentials without owning a degree, this is a positive step toward reducing the financial burden of student loan debt on borrowers.

The college degree that used to land us in a well-paying, full-time corporate job can also terminate in a post-graduate life of debt, living in our parents’ homes in our old bedrooms. We take a risk when we take on student loan debt, and regardless of the outcome, we still have to pay. Yet the data is clear that a college degree is the minimum requirement for many professional jobs. A college degree won’t guarantee you better work and higher earnings, but it’s likely to improve your odds.

Accessing Education

The Gig Economy is still in the early stages of a transition from a credentials-based economy of degrees, titles, and brand names to a skills-based economy that values specific knowledge and experience. Ivy League graduates and managing directors at Wall Street firms are still benefiting from the market-signaling effect of their degrees and titles, but the power of those credentials is waning in favor of workers with demonstrable experience and expertise.

We’re seeing new ways of work emerge in which demonstrated skills, knowledge, and ratings from prior work experiences are what matter, not where you went to school or what degrees you have. Topcoder, Upwork, Freelancer, and 99designs are places to find work and build a reputation regardless of your degree and title-based credentials.

The premise behind these and other sites is that the work we do, the content we create, and results from skills and knowledge tests provide a more accurate assessment of skills and knowledge than a diploma or title. Ernst & Young in the United Kingdom conducted an internal study of 400 graduates and found no evidence correlating professional success with prior education, but they did find that strengths-based and numeric assessments were good indicators of whether a candidate would succeed at the firm. Based on the results, E&Y has removed academic criteria as a requirement for its entry-level positions.¹⁹ It’s an early and bold move away from the signaling effect of college grades and degrees. At most companies, assessments and tests are recruiting tools that supplement academic degrees and corporate titles, but we can imagine a day when they begin to supplant them.

ACCESS IS THE NEW OWNERSHIP

The U.S. economy depends heavily on consumer spending and demand. If the access economy continues to grow and increasingly replaces ownership, it will disrupt the national economy. If individuals increasingly access instead of own their houses and cars and accelerate their renting of consumer goods that they used to buy, the economic impact will be significant and widespread.

For individuals, the access economy is nothing short of a personal financial revolution. Imagine and evaluate the flexibility, variety, and cost savings you could potentially realize by accessing consumer goods, cars, and housing. What would the impact be on your personal balance sheet? Ownership will still make sense in some cases and during some phases of life, but no longer needs to be the default choice. In a Gig Economy of insecure jobs and variable income, accessing the goods we want and need, without the debt, fixed costs, and physical ownership of so much stuff can be an attractive alternative.

To start thinking access, not ownership, consider:

What would be the financial implications of accessing the biggest assets I own?

Is home ownership for me, and what are the financial implications and costs of owning?

Are there ways I can reduce my education debt?

What opportunities are there for me to access education in the future?