As we detect signs of housing recovery – and rumors of housing recovery – you have to wonder how long it will be before we once again hear the chorus of everyone should be a homeowner. Despite the still lingering wounds from the last housing bubble, it seems to be a staple of economic recoveries that homeownership is for everyone.
Should we accept that doctrine out of hand, or should we view it with a much more critical eye this time around?
Where did the idea come from that everyone should be a homeowner?
After World War II came to an end, the country was anxious to go about the business of growing and prospering. More than 15 years of war and depression left everyone wanting and needing something different, and the post war years certainly provided it. It was time for the good life.
At the time, jobs were plentiful, housing was cheap and mortgage rates were low. The exploding Baby Boom made homeownership a sudden imperative. And as the Baby Boomers came into adulthood – smack in the middle of the inflationary 1970s – there were now more potential buyers with even greater incentive to own. Thanks to double digit inflation, owning a piece of real estate became an elevator ride to wealth. If you didn’t buy in, you were missing out.
The homeownership gravy train also got a big heaping helping from the political arena. Government saw homeownership as a way to grow the economy quickly. Any economic downturn was met by a barrage of new incentives to stimulate homeownership.
In the 1990s and early 2000s, the Clinton and Bush administrations were particularly aggressive in expanding homeownership. The rate of homeownership in the United States expanded from the 63% range in 1993, to nearly 70% by 2007.
Of course, they did this by neutering lending guidelines pertaining to income, credit and down payment requirements. We all know how that played out – the Mortgage Meltdown is now firmly recorded in the history books. But along the way, the lax lending standards did their part to further the idea that everyone should be a homeowner.
The downsides of homeownership
We live in very different times from the years when homeownership for everyone was entering the nation’s psyche. The economy, the job market, and house prices were much more consistent and predictable then. Today, we live in an economic environment that no one seems to be able to accurately define. Against that backdrop, homeownership may not be the right choice for you, and it certainly isn’t right for everyone.
Consider the following limitations that homeownership imposes:
Trapped equity. Despite the collapse in housing prices after 2007, a down payment on a house can still soak up a lot of capital. This is in no small part because lenders have made it very difficult to buy a house with less than 10% or 20% down. But a 10% down payment on a $250,000 house will require you to come up with $25,000 up front. And unlike the lending free-for-all of the 1990s and early 2000’s, you won’t be able to borrow out that equity in order to get access to the cash. It will be trapped equity.
Inability to follow jobs. Owning a home is like dropping anchor in a harbor, except that it is an anchor that does not come up easily. There is some research indicating that homeownership may impair the ability to find a job, and by extension, it hinders a general economic recovery. The findings aren’t comprehensive, but they make sense. If you own a home, but need to take a job in a remote location, your house – and more specifically, your inability to sell it – could force you to turn down the job. In that way, homeownership limits your job mobility.
Increasing use restrictions. Back during the Great Depression of the 1930s, people often converted their homes to economic uses. They might sell apples on the front sidewalk, grow vegetables in the back yard, fix cars in the garage, or rent rooms to boarders. Today however, homeownership often comes with use restrictions that prevent any economic use of your home. If you get into a tough financial spot, there is little you can do with your home to improve your situation.
Declining income tax benefit. Tax deductibility is often held up by the real estate community as a compelling reason to buy a home. But the combination of lower mortgage rates, lower marginal tax rates, and an increased standard deduction have made the tax benefits of mortgage interest and real estate taxes far less generous than they used to be. For many middle-class taxpayers, and even a fair number of upper middle-class, the tax benefits of homeownership are more myth than reality.
The monthly payment isn’t your only cost. When it comes time to qualify for the purchase of a house, real estate agents, mortgage people and buyers focus almost exclusively on “PITI” – principal, interest, taxes and insurance. But there is much more involved in the cost of homeownership than just your monthly house payment. You can probably figure that the house will cost you approximately 2% of the purchase price each year in repairs and maintenance. In some years you will spend less than this, but in others – like when you need to replace the furnace or the roof – you will be well above it.
Why you need to do what’s right for you – despite “conventional wisdom”
If the economy continues to expand, and especially if growth accelerates, the pressure to buy a house or to trade up on the one you have will grow. But no matter what the prevailing trend of the day is, you need to do what’s right for you.
If the idea of having tens of thousands of dollars trapped in the down payment of a house makes you at all uncomfortable, or if you fully expect to relocate in the coming years, or if you don’t like the idea of shelter taking up a disproportionate amount of your after-tax income, it is perfectly okay to not own a home.
If you do decide to go and take the plunge anyway, keep the following in mind:
- Buy less house than you can afford – there are many benefits for doing so.
- Be intentional about paying less for the house than it’s current market value – that’ll make it easier to sell if you need to.
- If you think you may go into business in a non-white collar field, consider buying a house with income potential.
- Don’t buy a house if doing so will leave you broke – jobs are too uncertain to leave yourself in that position even for just a few years.
Did you get caught up on the everyone should be a homeowner frenzy of the last two decades? Did you face any unexpected consequences as a result?