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By Dan Caplinger | More Articles January 19, 2012 | Comments (20)
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Ever since the end of the boom years of the early 2000s, the housing market has struggled to hit bottom, seemingly plowing ever lower even after years of declines. As a result, millions of former homeowners have lost their homes, while millions more owe more on their mortgages than their current homes are worth. Many have bemoaned this trend as meaning the end of the American Dream of home ownership.
But when you take away the emotional response to the housing bust, the question remains: Are falling levels of home ownership really such a bad thing? For many, owning a home never made financial sense -- and avoiding the burden of having so much debt on your biggest asset can make your financial life a lot easier.
Falling from record highsWhen the Census Bureau released its 2010 housing data last year, it revealed an astonishing fact: The percentage of Americans who owned their own homes fell by the largest proportion since the Great Depression. That made for good headlines at the time, as media sources proclaimed the death of the American Dream.
But a closer look at the numbers reveals a much different picture. During the Great Depression, many fewer people owned their homes -- around 45%, according to Census data. But by 2010, that rate was up to 65% -- meaning that tens of millions more American families became homeowners during that period. The rate even got closer to 70% before the housing crash happened.
The more important statisticBy themselves, these figures don't mean much. Whether someone owns a home or rents one from someone else doesn't matter in terms of overall demand -- as long as either a homeowner or an investor/landlord wants a property, the effect should be the same. What has really caused a problem, though, is the number of empty homes.
Again looking at Census data, the number of empty homes jumped by about 4.6 million over the past decade. When you consider that the total housing stock jumped by only 16 million homes, you can see that new supply far exceeded actual demand for real estate. Overbuilding was especially rampant in hot areas of the country, including the Desert Southwest and the Deep South.
Overbuilding worked out great for homebuilders at first, as it didn't cause any problem as long as there was enough demand for the homes. Between 2000 and 2006, Hovnanian (NYSE: HOV ) saw sales jump more than fivefold -- only to give back every bit of those gains by last year. KB Home (NYSE: KBH ) , which got in on the boom earlier, saw the same trend -- and its recent sales are only a third of its 2000 revenue. Standard Pacific (NYSE: SPF ) and other builders in particularly hard-hit regions were especially prone to big leaps followed by inevitable declines.
The new normalMeanwhile, the aftermath has driven many speculators out of the market -- at least those who are seeking short-term rather than long-term profits. Even though that hurts demand in the short run, it arguably makes the market healthier in that it more accurately reflects the intrinsic demand for housing as a necessity rather than simply as an investment asset.
Of course, not everyone wins in that scenario. Hamstrung mortgage banks Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) would likely prefer more speculation in the market, since it would help those institutions get bank-owned assets and bad loans off their books more quickly.
But for people trying to decide whether to buy, the combination of low interest rates and cheap housing makes buying as attractive as it's likely ever going to be. So if your finances don't work out to allow you to buy now, they likely never will. That may sound brutal, but that knowledge should help those who can't afford a home to make arrangements that will work -- and hopefully benefit from the freedom that not being tied down to a house provides.
The dream that became a nightmareSo rather than a regretful loss of the American Dream, falling home ownership could actually be good both for individuals and for the economy as a whole. Instead of betting your entire financial life on a place to live, you can look at the housing bust as your wake-up call to consider other priorities first.
Even if you have a big mortgage weighing you down, you still need to save for long-term goals like retirement. You'll find several stocks that can help get you there in The Motley Fool's latest special report. It won't cost you a thing, but jump on your chance now before it's gone.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.
Fool contributor Dan Caplinger was early buying his house, but he doesn't regret his decision. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy puts a roof over your head.
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<<<Instead of betting your entire financial life on a place to live,>>>
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I went through this on the recent Shiller article but lets try this again. Assuming you can rent for about 2/3 of a mortgage at current rates and rent increases at about the rate of inflation or about 3.5%/ year, rent will exceed the mortgage in about 12 years. Again assuming you take out a mortgage that your income can support show me how a lifetime of renting would beat a lifetime of owning. This isn't even getting into the real world reality of whether a renter is going to actually save the difference and invest it intelligently or spend it on something made in China.
To own a house could be considered if the owner(s) plan(s) to live there forever. Otherwise, to rent is a far better option.
^To reference the above, and to quote from the article :"...... benefit from the freedom that not being tied down to a house provides."
During the recent downturn in the economy, reports of people being "trapped" by their underwater home, unable to move to areas of better employment opportunity abounded. It is much, much easier to pull up stakes and relocate to a (potentially) better job marked if you are renting, as opposed to being obligated to a mortgage. It's not just the smaller financial stakes involved, but also the fact that people have less of an emotional attachment to a rented apartment than a property they own.
So you think ever increasing rental payments until the day your drop outweigh the inconvenience of potentially having to sell a house at some point? To be clear if you know you will be moving in the not too distant future certainly renting is the way to go but committing to renting long term to avoid a hypothetical need to move?
Try inverting the headlines and see what the emotional response is:
"Cost of living continues to fall"
"Housing becomes even more affordable"
"Housing expenses continue to decrease for middle class families"
"Housing becomes more accessible for students and lower income workers"
These all describe the exact same phenomenon as "Housing market crash."
If you are going to own a house to live in for 40 years, then MKarch is absolutely right - it blows away renting. And if you have the tenacity and dedication to be a landlord, then housing can be a good investment. A lifetime of owning versus a lifetime of renting is no contest.
But for many people - I'd argue most people - housing is a poor investment and owning a house is a poor decision. It locks you in to the nearby labour market as Wolfman mentioned, it locks up a significant portion of your income for the foreseeable future on interest payments (you don't really start building equity for years), and it literally hands control of your shelter over to a bank.
Also, there's a language gap here. You don't buy a home. A home is something you make with your family. You buy a house, which is just a wooden box that sits in the rain and rots around you. The housing industry would prefer to say "buying a home" because that activates emotional circuits instead of rational circuits.
And our policy of providing mortgage deductions to encourage housing ownership is misguided and short sighted and needs to be changed.
Remember, on average people move after 7 years.
If you have the kind of job security and foresight to know that you'll be in the same location in 30 years, buying a house is far and away the better choice. If you're at all uncertain, you should at least think it over thoroughly before taking the plunge.
I'd like to see some sort of "rent to own" arrangement available to provide the best of both worlds. Does anyone know if such a thing exists?
Disclosure - the figure cited above, average people move every 7 years, is pulled from a half-remembered website from a year ago and may not be particularly accurate.
Figured I should be up front about that, if I could go back and edit that post I'd delete the reference.
^Two things: 1)Having to sell a house "at some point" is more than an inconvenience if you aren't able to, and 2)many people who got into home ownership were obviously unsuited to the obligation, either underestimating how much work and expense is involved in maintaining a home or by over-estimating the appreciating value of the home as an "investment".
For many people, renting is the better option as it frees them up from the concerns of maintenance, taxes, and repairs. Also, there is the possibility of renters' investing the difference between what they need to spend on rent and what they would've had to spend on expenses associated with ownership.
It's rarely as cut-and-dried as a comparison between rising rents and a supposedly fixed cost of a mortgage. The total cost of ownership is more than just the mortgage payment. You need to include insurance & rising property taxes along with the usual maintenance expenses.
So, yeah. For some, the rising rents could easily outweigh the possible "inconvenience" of owning.
Damn, DJ. Looks like we agree on something else. Must be something in the water...... :)
<<I'd like to see some sort of "rent to own" arrangement available to provide the best of both worlds. Does anyone know if such a thing exists?>>
Actually, they do. Usually in a private sale by the owner directly to the buyer. That's how I was able to sell my home in this market. I rented to a friend and his wife who were enterpreneurs just starting a bagel/breakfast shop. They paid slightly less than market, with an agreement to purchase at the end of 2 years as an agreed-on price. A win-win for both of us.
@Wolfman - Yeah, it's becoming a trend it seems. With our powers combined... :lol:
That's a good arrangement, I'd be much more interested in someting like that rather than a straight-out purchase. Not yet, of course, I'm about to move for the fourth time in seven years so I'm staying as liberated as possible in terms of housing.
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