Is Home Ownership Still the American Dream?
Home ownership is at the lowest level in decades in the United States[i], and many industry pundits lay the blame squarely on millennials. But is that fair? Or even true? Let’s examine this.
How did home ownership become equated with the American Dream?
The term “American Dream” was first coined by James Truslow Adams, an American writer, in his book The Epic of America published in 1931. At the time, America was caught in the grip of the Great Depression. Millions of families had lost their homes and found themselves homeless and starving. The American Dream describes an ethos that folks desperately wanted to believe at the time that hard, honest work would result in financial security, the ultimate symbol of which was owning one’s own home.
We have found, however, that not all folks who work hard ever achieve financial security, or for that matter own their own home. As faith in the traditional ethos fades, fewer Americans own homes, and the trend toward not owning is still growing.
Will it come back?
Traditionally families bought their first homes in their late 20s or early 30s, so we are looking to millennials to begin buying homes; but they are not – at least not in the numbers necessary to stabilize homeownership rates. While many pundits posit that the reason is that millennials only want to rent in urban areas, Uber to work and walk to a coffee shop, there is really something else at work here.
Millennials are getting married and starting families later in life than their parents did, so they have less reason to buy a home early.[ii] Add to this a decline in the belief that real e state is always a good investment, since many millennials watched their parents struggle to keep their homes during the Great Recession, or lose them altogether. Moreover, because of low starting salaries, massive student debt[iii] and the lack of dual incomes, they have less ability to pay for a home early in life.
If we recall Econ 101 in college, we remember that the demand curve in the supply-and-demand model is driven by two factors: the desire of consumers for the widget and the ability to pay for the widget. Homes are no different than any other commodity that way. With less desire than their parents to own a home for multiple reasons, and less financial ability to jump into the market, it isn’t surprising that millennials aren’t buying at the same rate as previous generations.
But is this a wise move on their part? If you can’t buy a home, then of course the decision is made for you. But if you can buy a home, should you?
While watching their parents lose everything in a severe recession understandably made folks question the traditional wisdom (that homeownership is always a good investment), new regulations and lending safeguards make the financial crisis very unlikely to happen again, at least to the same scale.
Some folks have noted that it is much more expensive to own a home than to rent, and that it true – at first. But tax deductions make up some of that difference for most folks.
Further, rent goes up, while mortgage payments do not – at least if you have a fixed-rate mortgage. Property taxes and insurance go up over time, but usually at a much slower pace than rent, and they are only a small part of your monthly housing cost. And with homeownership, eventually your mortgage is paid off and your payment disappear. *
Finally, there is the principle of leverage. When you home appreciates, you are not only making money on the money you have invested in your home, but on the money your lender invested as well. This simple principle will double or triple your return on investment. You cannot leverage your savings accounts, and most folks can’t leverage their investment accounts, either.
Mortgaged real estate is the only real leveraged investment available to the average Joe. The sooner you buy the sooner your monthly payments begin paying down your mortgage rather than paying someone else’s, and the sooner you eventually pay off your mortgage.
Still, owning a home is really not for everyone.
- If you have to stretch to the very limit to buy a home, it may not be wise, because the first emergency could bury you financially.
- It costs about 10% of the purchase price of a home to get in and out, in real estate commissions, title fees, etc. If you don’t plan to stay at least three years (or more, depending on the appreciation rate in your area) it may not be wise.
- If you are likely to move for any reason within the next three years you should probably not buy a home. (Although I have clients who buy a home in their destination area a few years before they move.)
- If you love to travel and want to spend your money there, the responsibilities of home ownership may not be for you.
However, if you want the stability of knowing you can never be forced to move, want the satisfaction of creating your own home exactly the way you want it, and want to build wealth over time with the greatest certainty, consider re-thinking your negative thoughts about the American Dream.
Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
My Blog: www.loanguide.com
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- To see how this analysis works, read Rent vs. Own – Where is the Break-even?
[i] Tuttle, B (2015 July 28) U.S. Homeownership Level Drops to its Lowest Level Since 1967, retrieved from http://time.com/money/3975212/homeownership-rate-record-low/
[ii] Davidson, J. (2014, November 12) What Everyone Gets Wrong About Millennials and Home Buying, retrieved from http://time.com/money/3551773/millennials-home-buying-marriage/
[iii] Notte, J. (2014 December 11) Why Millennials Aren’t Rushing to Buy Homes, retrieved from http://www.cbsnews.com/news/how-will-millennials-buy-homes-if-they-dont-know-their-credit-scores/