Home ownership has long been a goal for many Americans, but now more people are worried that the troubled housing market means it's not a good time to buy a home, and they're kissing their plan goodbye.
Since the housing market collapsed in 2008, forcing millions of underwater homeowners out of their houses, real estate has become a scary and unreliable investment option.
"The emotional scars left by the collapse are changing the American psyche," Pete Flint, chief executive of real estate Website Trulia.com, told The New York Times. "There was a time when owning a home was a symbol you had made it. Now it's OK not to own."
The rate of U.S. homeownership is down to 66.4%, the lowest since 1998, according to the U.S. Census Bureau. Some experts say it could fall to the level of the 1980s or earlier.
U.S. home prices keep sliding as many Americans decide owning a home is not for them. Prices last week fell to their lowest level since 2002, according to the Standard & Poor's Case-Shiller Home Price Index, erasing some of the gains made since the record low reached in 2009's first quarter. Prices are down 33.1% from their July 2006 peak.
Some see falling prices as a great opportunity to take advantage of the troubled market and buy a house. But many would-be buyers are leery of investing in houses that are unlikely to appreciate any time soon. The number of Americans who think buying a home is a safe investment has fallen to about 66% from 83% in 2003, according to a national survey by Fannie Mae released May 11.
Instead, many choose to rent.
"They're renting and they're happy renting because they're scared," Douglas C. Yeardley Jr., chief executive officer of luxury homebuilder Toll Brothers Inc. (NYSE: TOL), told The Times.
Even though many Americans can afford to buy homes at the current near-record lows, they prefer the benefits of renting to the commitment of owning a home. Renters have the flexibility of not being tied to a certain location, should they have to move to find work or a more affordable place to live.
"We have more of what we call ‘renters by choice' than I've seen in the 40 years I've been in the apartment business," Jeffrey I. Friedman, chief executive of Associated Estates Realty Corp. (NYSE: AEC), told The Times.
Renters pay less each month than if they had a mortgage, and use the extra money for savings and other investments that offer better returns than buying a house.
"For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership," Jordan Rappaport, senior economist at the Federal Reserve Bank of Kansas City, told The Times.
Rappaport found in a recent study that homeownership only half the time builds more wealth than other investing techniques.
Still, some housing industry members remain hopeful the goal of owning a home is not dead, just on hold.
"Most people still want the big house with the big lot in the desirable school district in the suburbs," said Toll Brothers' Yeardley. "No one ever renovated the kitchen or redid a room for the kids in a rental. I think – I hope – we'll be O.K."
This prompted last week's Money Morning "Question of the Week": With the weak state of the U.S. housing market, do you recommend owning a home? Or do you favor renting? How important is it to you to be homeowner one day? How has the U.S. housing market and home prices affected your home-owning decisions? Have you been helped or hurt by low prices? When do you see prices recovering?
If you're searching the real estate market, check out the following reader thoughts on if now is a good time to buy a home.
We sold our home a year ago, and I feel very fortunate. We are currently renting, and will probably not buy again for at least a few years. Partly this is because I don't expect prices to bottom real soon, and even when they do, I don't expect a sharp rebound, but mostly it is because we want to be more free to move around. A home may be an investment, but it can be a very illiquid one.
I have a good friend in the United States, where I used to live, who got a job and moved in about a year and a half ago. He and his family immediately bought a home, but now his job has moved, and to keep his job he must move also. However, the home has depreciated since he bought it, and even worse, there are just not many buyers, so he is stuck, hoping to get lucky.
So, do I think this is a good time to buy? If you are confident that you will be in the same place for at least 10 years, then possibly. Interest rates are low, and prices are a long way off their highs, making a home relatively cheap, compared to any time in the last decade or more. But don't consider it an investment. If you can rent just as cheaply, then that may still be the better option. Certainly, if your plans change, and you need to move, life will be a lot simpler.
As an ex-realtor I have some insight into this question.
First, it would be very important to have a secure job or vocation before buying. Try to find a property near your job, preferably one you can bicycle to. If you think you may have to move before the home is paid for, or you are just starting out, get a rental property. If you do have to move, you can rent out your unit.
Get something cheap. Don't pay more than 25% of your income for housing. Pay it off as soon as possible, no longer than 20-year mortgage. When your rental is paid for, you can then buy a single-family home and use the income to help make your new payment.
I purchased my property in 2004, finished paying for it in 2007 and it has doubled in value since purchase with no improvements, just upkeep. I bought it right (previous owners were about to lose it), and it is a business – a farm.
Whether or not it's a good time to buy a home depends on your stage in life, and where you live. I would recommend owning, if you plan to live in your home forever. I don't view ownership as an investment. I think that mindset is what brought about the housing collapse, as the banks encouraged unqualified buyers to 'own' a home.
At the present time, I own several properties, including rental homes. I have no mortgages on these properties, and they bring in a modest income after taxes, insurance and maintenance. It is not for the faint of heart, and is not always easy to deal with tenants. I would actually like to sell one of these properties, but the market is too low.
Two years ago, I spent almost $7,000 for new central air to replace a worn out one. They last 13 to 15 years, I am told. In another few years, I will have to spend a few thousand dollars to replace my shingles. That and all of the other costs involved in home ownership make me wonder if it is worth it.
But, then I look forward to the time when the house is paid off and other people are still renting. The house payment I won't have is quite a lot all by itself.
I love owning my home. Finally – freedom to do what I please!
Back in June of 2009, my wife and I had no choice but to move – which turned out to be a blessing. So we looked at over 75 homes. The first realtor tried to rip us off with a sinkhole home.
Then I found a realtor who found us a home built in 2007 with an acre of land. No neighbors on either side or in front. Right near the schools. A $330,000 home before the 2008 crash and we got it for $128,000 in 2009 – 4.5% 30-year fixed mortgage through Bank of America, with my wife the only one working. They thought we would lose the home, but didn't.
Just put in $6,000 worth of Brazilian cherry flooring.
The real estate market has a long way to fall before people will buy. Nobody in their right mind would buy a home now with the market only halfway down the toilet.
[Editor's Note: Thanks to all who responded to last week's "Question of the Week" about U.S. home ownership.
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Not good from an investment perspective.
It's not a good time to buy a home at all at least for 5 yrs from my perspective, am in a finance industry as a credit analyst… wait wait and wait until the economy really start to rebound.
Seems like the majority of people would encourage others to buy. My wife and I bring in good income and we are really thinking about buying. She's definitely more excited than I am.
I am concerned because although things are going better for us financially then they were 1 or 2 years ago, I still feel some uncertainty with employment and finances. I have been back to work for 1 year after being laid off for 17 months. I make over $10,000 less then I did in 2007-2008. My wife has added some credentials over the last 2 years and her income has increased, but she is currently in her 4th position in 4 years. She was laid of in successive years (2009, 2010).
We are renters with a 15 month old daughter. Although our apartment is spacious we feel that we have outgrown our current living arrangements. I'm seriously debating renting a house or a condo somewhere at least for a year instead of investing in our own property.
1. Further indebting ourselves with a mortgage and the cost of obtaining credit on top of our student loans and other obligations such as energy costs is unattractive in an unhealthy economic environment.
2. Sure homes are cheap right now especially in Southeastern Michigan, but the added expenses of triple+ taxation by the state/local goverments (income, sales, property, regulations) really increase the costs. Due to the irresponsible and underwhelming Federal Government were suffering from increased inflation and prices. Our money has lost buying power.
With all of the maintenance and improvement costs for new home owners, buying things such as lawnmowers, roofing, paint, carpeting, furnishings, appliances, and other electronics can be intimidating. We have credit, but why would we want to further indebt our selves to buy these things as our dollar continues to weaken and with our government doing relatively little to address the issues?
3. I'm not trying to sound like mister gloom and doom, but the last thing has to do with prices raising on everthing but focusing on GAS. I don't really like the area I work in at least when it comes to buying a home. My wife is in education and works in the ghetto so we don't like her work area. No matter where we move we will be subject to higher fuel costs due to our daily commute. Spending $120-$180+ dollas per week on fuel combined with increased food costs is definitely a concern.
I would love to be a home owner, but I can't see myself being happy and confident in the investment (whether you view it as one or not it's an investment) knowing that there are fools in goverment who want to infinitely print money, raise taxes, interefere in the free market with regulations and other things, spend freely, increase government size, deindustrialize us, create unfair trade advantages, refuse to prosecute criminal bankers and then when SHTF blame it all on welfare recipients, unions, and retirees (not saying we don't have a lot of waste in entitlements).
How does the housing market bounce back when 1/5 of the country is jobless? Or 44 million Americans are dependant on the government for food?
We will continue to look for a home, but I guess I just needed to vent.
Thanks for this. And good luck.
Buy house with $140k or less and go with 7 years arm at 4% interest rate.
Plan to pay off in 7 years or less.
Either way, plan to payoff the house with in 7 years.
Keep in mind, your goal are not to have a car loan or a mortgate.
I make only 40k a year, but i dont have a mortgate or car payment, pay everything by cash.
Travel international every year. Enjoy a nice health membership club, workout every other day.
After all, being healthy is gold.
If the governement, when it had printed money, had loaned it to homeowners idirectley instead of banks it wouldn't be in the mess that it is. The collatarel would be the house. The interest rate would be .05% and folks wouldn't default. They would have more money to spend on cars and houses. Houses would then retain value and their collateral would be A grade again. Instead banks take the money at .05% create a bubble in everything, including treasury bonds paying 3% and sit back and watch the poor and dispossesed suffer. A bit more suffering and a bit more free time to realise the truth and Americans will hang the banks out to dry. They are not to big to fail. They are too lazy to try and succeed without the governements subsidies.
All around amazingly written blog..