Friday, October 7, 2011

Home Ownership Losing Appeal

Today's Wall Street Journal describes declining home ownership in the US:
The rate of home ownership in the U.S. fell in the last decade by the largest amount since the Great Depression, although the percentage of Americans who own their home remains the second-highest on record, the Census Bureau said Thursday.
...with info graphic:

I've discussed the rent vs. buy decision before, but I think this is more about the shift in attitudes towards home ownership.  If you are in your 40s or later, you may have experienced or been part of the housing boom - low or no down payments, buy a home, then either refinance in a few years or sell at a profit to realize the gains on your investment.  As the recession hit, those who were still in the game of "flipping" houses got stuck and watched their once profitable investment become a big, illiquid, losing investment.  The economy hasn't substantially changed, so why get involved in that mess again?

For those who are younger, the weak economy creates uncertainty.  Do I really want to sign up for hundreds of thousands of dollars in debt and be fixed in my location when I could potentially lose my job or be assigned elsewhere?  You probably also don't view buying a house as an investment that will pay off anytime in the near future.  Renting seems like a much better option.

So how do we make home ownership more attractive again, or should that even be a policy goal?

Many believe that until we "solve" the housing problem, the remainder of the economy will stay weak.  The Fed, in it's "Operation Twist", is helping to keep mortgage rates low to spur home buying and refinancing.  Other proposals have been floated, going as far as to suggest vacant homes should be blown up to reduce the inventory of unsold homes.

The problem with these (rational) ideas is that the inventory is massive.  Bloomberg notes:
The nation added almost 16 million homes, a 13.6 percent increase from 2000, as the number of vacant residences rose to 15 million, a gain of almost 44 percent.
You can spur buying around the edges, but you can't force 20-somethings to buy a home when they don't want to.  You can't force parents with college-bound kids to take on a new mortgage.  In fact, the harder you push to create demand, the more likely you are to create bad loans - not unlike those that got us into trouble in the first place.

I believe the solution is to let nature take its course.  Government intervention seems to almost always create unforeseen consequences and is frequently gamed by those who need assistance least.  This will mean a long and painful period for those who hold mortgages that are greater than the worth of their home.  They should rightly consider "strategic default" as an option.  Those who are not in as dire of a situation should consider their home a place to live and forget any hopes of realizing gains on the value of their home.  And for those renters out there, they need to see the lesson of what can go wrong when greed and government policy meet.

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