Tag Archives: rent vs own

Get Used to the Low Home Ownership Rates

This is a cross-post of something I wrote for the work blog:

From the 6/8/15 Wall Street Journal:

The U.S. homeownership rate is below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage Americans to buy homes. Conventional wisdom says the rate, at 63.7%, is leveling off to where it was for decades before the housing-market peak.

But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least 15 years.

Demographics tell the story.

Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.

The upshot is that fewer than half of new households formed this decade and the next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners.

The downtrend would push homeownership below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.

You really should read the whole article. A couple of people who disagree with this assessment are quoted, but even they see the rate of home ownership stabilizing and staying lower than it was before the recession. There’s also some discussion about the impact on housing affordability, and interestingly it’s led by Ron Terwilliger who was the keynote speaker at this year’s Apartment Association of North Carolina (AANC) education conference. He has some interesting ideas about reducing the mortgage deduction and moving some of those dollars over to help with rental housing. That would be a political hot potato, but it’s a sign of how different times are these days.
All in all, those signs bode will for the apartment industry from years, maybe even decades to come.

A Crisis of Confidence

This article in the Wall Street Journal caught my eye.  Why?  Here's a taste:

Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today's battered housing market mean that lenders are doing so more and more.

Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today's foreclosures take place following a four-year decline in values.

"Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt," says Michael Cramer, president and chief executive of Dyck O'Neal Inc., an Arlington, Texas, firm that invests in debt. "Before, it didn't make sense [for banks] to expend the resources to go after borrowers; now it doesn't make sense not to." 

Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.

Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a "strategic defaulter" who chose to stop paying because the property lost so much value. 

For years and years and years owning a home has been seen not only as the American dream but also as a potentially lucrative investment.  There were certainly plenty of personal finance experts who warned against viewing your house that way, who pointed out the inherent risk of homeownership, but given the meteoric rise in real estate values from them mid-90s to the mid-00s it's hard to blame people for viewing their homes as investment vehicles.  Now, of course, it's become all too clear that your house can actually become a financial albatross, decreasing in value to the point that you can't afford to move even if it means getting a job in another city after being laid off. Worse, as the article points out, your home can become a debt grenade that blows apart your entire financial existence.

In my opinion there's a kicker here that not a lot of people are talking about.  Many of the people being decimated by the housing crisis have children who are watching this and who are going to come of age believing that homeownership is a risky endeavor.  They'll have experienced the housing crisis viscerally, in much the same way my grandparents experienced the Depression, and I think their behavior will be affected accordingly.  Let's put it this way – my grandparents never gave up their frugal habits.  They reused everything, they saved all leftovers (you learned real fast that my Granny had no expiration dates on the food in her freezer and you ate at your own risk), and pinched every penny within an inch of its life 40+ years after the depression ended and they were living a very comfortable middle class life in Winston-Salem.  You just don't forget those experiences and I think the number of kids who will have seen the flip side of the American Dream will always view homeownership with a great deal more skepticism than those of us who came of age having only seen the positive side of homeownership.

Note: I need to point out that these opinions are mine and don't reflect an official position by my employer or anyone I work with.