why home ownership matters
The homeownership rate has fallen to a 50-year low. As of the second quarter of this year, 63.1% of households were homeowners. If the trend of the rising number of young adults still living with parents is accounted for, and we count them as renters rather than being in a home owning household, then the ownership rate in the U.S. would be even lower. Is that a concern for the country, or should we just let it be as a reflection of consumer choice?
First and foremost, the fall in the homeownership rate is not the choice of consumers. To my knowledge, every survey of consumers of their American Dream unambiguously shows people desire to own. Therefore, homeownership satisfies people’s aspirations. In NAR’s survey of consumers (the Housing Opportunity and Market Experience survey), 87% said homeownership is part of their American Dream. Similarly, 86% of consumers agreed with the statement that homeownership is a dream come true in a recent Ipsos survey. To be fair, some did indicate it may not be the right time now, but still wished to own at some later point in life.
Second, sustainable homeownership has provided for wealth accumulation for owners. According to the Federal Reserve’s Survey of Consumer Finances, a typical homeowner’s net worth was $195,400, while that of renter’s was $5,400 as of 2013. Given that home prices have risen by 17% since then according to Federal Housing Finance Agency the wealth of home owning Americans would have grown even more. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale. The results are based on a median figure and not an average so as to better reflect the middle point and not be skewed by a small percentage of super wealthy families. With the advantages of hindsight, unsustainable ownership, as occurred with easy subprime mortgages a decade ago with the homeownership rate peaking at near 70%, was a huge mistake that should not ever be duplicated as many homeowners fell on harsh times facing foreclosures. Currently the mortgage default rates are at historic lows, clearly indicating that mortgage availability is too stringent and thereby unnecessarily leading to over-correction in the homeownership rate.
why home ownership matters
Third, homeownership is good for the economy. Americans do not view ownership as one and done. They want to constantly improve. So homeowners after 7-to-10 years typically sell their starter home and trade up. For some empty nesters, improvement may mean downsizing. Whatever the case, homeowners do buy multiple homes over their lifetime and in the process contribute to economic growth and job creation. With each home sale, there are expenditures related to lawn care, home remodeling, new furniture, mortgage origination, moving, and an inducement to build new homes. Some portions of these earned incomes subsequently get spent in the local economy – what economists call the multiplier effect - in the form of eating at restaurants, going to a ballgame, or buying a car. In essence one new job is supported from every two home sales, according to NAR calculations.
Fourth, homeownership provides social benefits beyond pure financial and economic benefits. Research on the subject has found that, other things being equal, children of homeowners do better in school (higher test scores and lower anti-social behaviors). Lower crime and lower drug usage were among the findings for the children of homeowners. Homeowners are more likely to be involved in community civic engagements, local elections, and volunteer work compared to renters –again with other things being equal. Health outcomes are also better with homeowners. Perhaps this result arises from a better sense of self-control and self-worth among homeowners versus renters as academic studies have shown. A recent study from the Boston Federal Reserve found that the income of homeowners’ children rises if home values rise, speculating that housing equity permits more human capital investment. This study reinforces the need for sustainable homeownership and not unsustainable homeownership.
Fifth, it is worth speculating about human nature and our almost primal desire to have our own turf. Herando de Soto, a famed Peruvian economist who remarked on the importance of private ownership in economic development, noted that even in communal areas with fuzzy or nonexistent land titles, such as in Brazil’s favela – dogs know exactly where the boundary lines lie as they will aggressively bark when a trespasser intrudes into their owner’s presumed private property. It’s just unfortunate that there are no legally recognized boundaries, which prevents owners from maximizing the usage of their property, including as collateral to borrow capital for starting a business. Let’s also not forget about those “renters” living in a parent’s basement who no doubt would have the desire to form their own households. Though quantitatively difficult to measure, this aspiration to own and the hope for a better future surely drive people to want to study and work hard.There are multiple positive benefits of ownership to individuals and society. However, it has to be sustainable. Homeowners must understand the responsibility of ownership and take on a mortgage that is manageable and not overstretch their budget. At the same time, there should not be any unnecessary barriers to ownership. Widen mortgage access to those homeowners who are willing to stay within budget. Assure an adequate supply of homes at all price points to assure the future possibility of steadily moving up in society. This may require relaxing some of the financial banking regulation for local community banks so more construction loans can be made. Re-focus community colleges to bring more skilled labor into carpentry, welding, plumbing, and electrician careers so homebuilders are not constrained by labor shortage. Local zoning laws may need to be reviewed and carefully developed so that inclusive zoning and hence homeownership opportunities expand rather than are shut down from blanket not-in-my-backyard sentiments. There are no doubt other great ideas to expand homeownership in successful and sustainable ways. But one thing is clear: homeownership matters.