Recent poll results on the attitude of younger Americans toward real estate and home ownership have raised questions as to exactly what the role of real estate is and will be in the future. Is owning your own home an investment and source of wealth, or is it a ‘ball and chain’ that locks you to a locale and saps money that — if invested in stocks — would appreciate faster than real estate?
This question seems to outline the two most common opinions emerging in the generation of potential homeowners now between the ages of 21 and 35, where most of our first-time homebuyers tend to be. Here are the primary arguments laid out on both sides of that question.
Ball and Chain
If you’ve been watching the housing market in the last few years, you certainly can see where someone would come up with this notion. Many people feel locked into their current home, current city, even current state because they can’t sell their home to move to a new job or a better performing region of the country. Some homeowners are paying mortgages that were based on a sale price substantially higher than the house is currently worth. There are even economists who are predicting that with the economy evolving into a digital one, it will be more important than ever for the workforce to remain fluid, easily relocatable, and that buying property that can’t be loaded onto a truck and moved (like a house) doesn’t make sense in the future.
There is no doubt that the effects of the Great Recession are still felt most sharply in the housing sector. Most experts agree that it will take another year or two for the excesses of the housing bubble to work through the system and for the housing market to begin to resemble a “normal” market that responds in the ways that it has in less troubled times. Certainly, these are fresh reminders that there is no such thing as a “safe” investment, and that every one has to learn to live with a certain amount of risk.
Source of Wealth
The data over time gives a great deal of support to the idea that owning a home is one of the greatest sources of wealth, and wealth building, in the United States. The National Association of Realtors did a study on Housing Wealth Effects in 2004, which looked at the difference between household wealth for owners and renters in the period between 1984 and 1999. Since this does not include the period of the housing bubble, its results can be seen as closer to the average return you might expect over normal times. The study concluded that “a typical renter household in 1984 had accumulated $42,000 in net wealth by 1999, but a typical owner household in 1984 had accumulated $167,000 over the same period. Marital status, age, race and ethnicity, initial wealth and household income … accounted for only $20,000 of the net $125,000 accumulated wealth difference.”
That $105,000 difference is, almost without exception, due to home equity from both paying down the balance of the mortgage and the appreciation of the value of the property over time. The Case-Schiller Index of home prices shows that from 1987 to 2009 the price of existing homes increased by an average of 3.4% annually. This period includes the bubble, but also the crash from 2007-2009. Since most bank accounts yield considerably less in annual interest, that figure doesn’t look too bad as a way to grow your money. Yale University’s Robert Shiller has calculated that, in the period from 1950 to 2009, the S&P 500 yielded a real price change of 3.3% annually — surprisingly close to the appreciation in housing.
There’s one more point in housing’s favor: with government-backed mortgage insurance programs, the opportunity to invest in a home is much more open to people of average means. Few bankers are going to lend the average person $100,000 to invest in the stock market. But, average people purchase homes every day by taking out FHA mortgages that require only 3.5% downpayment. These programs open up long term investing through real estate to working and middle-class Americans in ways that don’t exist for the stock market. Its not a get-rich-quick scheme, but studies have proven that it works.
This will continue to work for a new generation of homeowners, but only if Congress allows Fannie Mae, Freddie Mac and the Federal Housing Administration to continue to offer the type of government-backed mortgages and mortgage insurance that have made home-buying money available to people of average means with good credit. Without that support, the 3.5% mortgage downpayment programs will surely disappear. Mortgages will most likely be available only to borrowers who have between 10-20% of the purchase price in their savings, because private lenders will be unwilling to take the risk of underwriting 96.5% of the purchase price without government support. By making home ownership less available, a generation of workers will have the greatest avenue of building private wealth cut off from them. What will that America be like?