Homeownership no longer a must
In today's shaky economy, mobility makes sense
By Steve Bergsman, Monday, January 3, 2011.
In October, Lennar Corp. took the road previously not taken. The Miami-based homebuilder decided to invest its hard-earned dollars not in new housing developments, but in distressed real estate, buying $740 million in busted assets from three financial institutions. At this point in the housing cycle it was probably a better use of its capital.
From April 2010 when the federal homebuyer tax credits expired, sales of existing homes slid lower and lower and lower. The National Association of Realtors' figures for August showed a 19.2 percent decline over August 2009. And the Wall Street Journal reported home sales were lowest for any month since 1997 except for July.
It seems the only thing keeping the housing market afloat from 2009 to early 2010 were the tax credits. Otherwise, even with record-low mortgage rates, the American public can't be pulled, dragged or cajoled into buying a new home.
Real estate folks suggest the market has reached an impasse: Buyers won't buy unless prices are deflated even more, but sellers feel they have dropped prices more than enough to make a sale.
Economists, looking at the bigger picture, suggest the high unemployment numbers are the culprit and unless the job picture perks up there will be no major improvement in home sales.
The futurists point to a number of potential housing-price deflators ahead: a double dip recession, which will knock the stuffing out of current home prices; shadow inventory of technical-default homes that have not been put on the market; or the 11 million borrowers who are underwater on the homes but could be joined by millions more if prices decline further.
I have my own theory: The concept of homeownership as a necessity of modern life has been broken, bagged and tossed in the trash.
Americans have always believed the one true goal in life was to own a home. However, it was never really an attainable concept for everyone; for many it was a pipe dream, like hoping one day to become a millionaire, or in today's inflated numbers, a billionaire.
That all changed after World War II.
The millions of soldiers and sailors coming back from the war, many newly married, had nowhere to live except with parents because little new housing had been built during the war years. Then in the late 1940s, two things happened. William Levitt conceived Levittown, the first massive housing development to be built using modern, assembly-line manufacturing techniques, thus paving the way for the development of the suburbs we know so well today.
Secondly, the government moved to make mortgages easier for Americans to obtain, including such wild and crazy innovations as increasing the payoff on a fixed-rate loan to 30 years.
Since then, we have been building developments and creating new, innovative and sometimes disastrous ways to get more mortgages to more people. In effect, we created a psychology of homeownership.
Those of us living in the United States began to feel that to really be an American, one had to own a home. Unless one lived in a big, urban setting like New York, Boston or San Francisco, not owning your home was considered somewhat un-American.
Developers, of course, leave no stone unturned and allow no ground to lie fallow. They took dead aim at those big-city, non-home-owning types by creating the high-rise condominium, or in New York, the co-op. There was no way to avoid it -- you had to own something.
This psychology of homeownership became even more distorted over the period of the mid-1990s to mid-2000s due to rampant inflationary pressure on home prices. By throwing price appreciation into the mix, it was like adding LSD to the Kool-Aid.
If somehow you hadn't gotten the message that it was definitely not OK to not own a home, the new concept of the house as your primary family investment was too overwhelming to disregard.
And just like at the end World War II, the federal government along with the banking system once again conspired to make things easier and easier to get that mortgage.
The bursting of the housing bubble has changed all that. The concept that your house is something more than shelter, that it's the safest or best investment you'll ever make, has been destroyed.
In addition, owning a house is not always a positive. It can also be a negative, and not just because your mortgage may be larger than the value of your house.
Homeownership restricts movement, and the other great part of the American experience is fluidity, the ability to pick up stakes and move somewhere else in the country for the hope of a better life. Or, in today's reduced standards, simply for the hope of a job. If you are unemployed today in Minneapolis and you can't sell your home to look for a job in Austin, you're screwed.
So where do we stand today?
To quote Stan Humphries, chief economist at Zillow, "We are in an era of historical low mortgage rates, reaching levels not seen in decades. Coupled with four years of home-value declines, homes are more affordable than we have seen for years."
At mid-year 2007, just as the subprime mortgage market was about to blow up and lead the country into a recession, the average weekly rate on conforming 30-year fixed-rate mortgages was close to 7 percent. This past summer, the average rate on the same mortgage instrument kept hitting new lows. Now, it's trending around the 4.8 percent level.
Even with money as cheap as we can remember in our lifetime, and home prices that have declined as much as 50 percent in some cities, we still can't induce enough people to buy homes. The reason being: It suddenly has become all right to be a non-homeowner.
What a strange concept.
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.
| Contact Steve Bergsman: | |||
 E-mail |  Letter to the Editor | ||
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Cindy Marchant on January 3, 2011 - 6:53am.
I can only hope you are wrong, but your comments are definitely insightful. I'm hopeful that people still want a home base because they need to have a job that is located in a particular city. I know that jobs are becoming more transient as well..but the majority are still in bricks and mortar that require showing up.
I'm hopeful because I'm a Real Estate agent and would like to still be one five years from now! lol
Cindy "in Indy" Marchant
Submitted by Kimberly Davis on January 3, 2011 - 7:44am.
Very good article--one of the better ones I've read. However, I still think that when the fear begins to subside and unemployment begins to drop, that people will realize SOMEONE has to own the property they are living in. Why pay rent to a landlord and pad his/her pocket when you can pad your own? Owning real estate is still the number one way to get rich--just ask Donald Trump. Yes, there are ups and downs, but as Americans, I believe we have the capacity to recover from our mistakes. I just went to a 15-year mortgage at 3.75% and I couldn't be happier about my decision, even though the value of my home has dropped. I will still have SOMETHING to live in (or off of) at retirement, and it will be paid for.
Kimberly Davis
Village Real Estate/Nashville
Submitted by John Sieling on January 3, 2011 - 8:37am.
Thank you for having the courage to post this article and viewpoint. Chris Thornberg said the same back at REO MAC in April 2010.
For agents fearing this realty, relax. We make a living from transactions, not espousing a vision of ownership. Adapt, change, grow.
John Sieling, Today Sotheby's, San Carlos, CA
Submitted by Nancy Rivera on January 3, 2011 - 9:20am.
What a strange concept, indeed! I agree, tho, with those that say it's a bad job market that is keeping many from buying their own home.
Submitted by William Metzker on January 3, 2011 - 9:58am.
This is one of the predictions I made in an Inman essay when the downturn started. Since then, a half dozen or more scholarly books, including Niall Ferguson's The Ascent of Money, have demonstrated that home ownership is not a path to wealth, using data since the 1920's. Still, it's a hard fact for Americans to swallow, because it goes against our national grain.
Here's another prediction: A new form of ownership related to interval ownership will come up in the next few years, with buy/sell options partially covering market declines.
Submitted by Jim Paulson GoOwnIt@gmail.com on January 3, 2011 - 11:15am.
That just goes to show that even builders/developers recognize that the current housing prices are valued at far less than replacement costs and offer a great value! I have seen builders here in Boise land bank finished lots since they were being sold for less than the development costs alone due to distress.
Jim Paulson, CRS, GRI, EPRO, SFR
Owner/Broker - Progressive Realty Corp.
Boise, Idaho
Submitted by Andrew Waite on January 3, 2011 - 11:56am.
Underlying this is an unnecessarily controversial statement about home ownership. The source of most of the data that is dismissive of residential real estate as any sort of investment. It comes from traded asset (read stock market boosters) economists. Wall St understands very clearly that any dollar put into real estate by a consumer is a dollar lost to their tender management.
The data these money center economists (and Manhattan centric journos) subscribe to ignores real estate as a tax shelter, as leveraged by a mortgage, as an inflation hedge, and if bought as an intentional investment, income that is also inflation hedged.
Arguing that home ownership is not aspirational is the philosophical equivalent of saying marriage is obsolete. The only people that believe this and actively promote it live east of Hoboken or West of Oakland. The good news is rest of America doesn't read or react to theories espoused by leading" thinkers like Shiller, Ferguson, Metzker or Bergsman.
Owning a well bought home always beats renting, economically and philosophically. It is the Realtor's role to help ensure a wise transaction.
The great news is selling an idea that requires changing human nature is normally a losing proposition. Home ownership and property is a fundamental transition point from a feudal to a capitalist Western society. Home ownership an one anchor of the American experience and differential from many other societies. Rolling this back is a changing human nature and good luck with that.
Andrew Waite - Publisher
Personal Real Estate Investor Magazine
Submitted by David Fletcher on January 3, 2011 - 6:07pm.
Steve, Ive been through five recessions as a 35-year real estate broker. Your column is interesting but I respectfully don't understand your assumptions or agree with most of your conclusions.
First of all, the tax credit, which attracted many first time homebuyers, proved that renters will buy. Every housing economist and any thinking person knew that the incentive was designed to create urgency and would result in a second half slowdown.
While it did not create a new market, it did help the simmering market to make a buying decision. The program, without urgency, would have fallen flat on its face.
Second, You didn't explain why Lennar purchased foreclosures. Could it be possible that Lennar is getting into the renovation business with homes in "close in" locations? I don't have any first hand informaton, but I think so. Keep an eye on how fast these homes sell, and watch how fast they and other production builders get into the business if Lennar is successful. Who better than the production builders to start buying up inventory by the bulkload?
Third, Much of the supply is in sunbelt states where numbers are skewed by the large number of condominiums in foreclosure that were never listed in MLS and researchers will tell you are hard to count.
Fourth, mortgage rates and prices have very little to do with the lack of sales. Job loss and fear of job loss are the biggest reasons.
Here what I see,and Im just guessing:
I don't see the movement you do. I see more families working out of their homes and their homes can be anywhere they want to live, with fixed mortgage payments they can build budgets around.
Once jobs come back and inflation fears become a reality, we will see how many families would rather protect their mortgage payments rather than risk ever increasing rents and how many will like to move to a less favorable lifestyle because they cannot afford rent increases.
I see people settling down, focusing on family and living within their means, and not buying the most expensive home they can afford.
I see Lennar and other homebuiders buying larger and larger pieces of the foreclosures and large chunks.
In closing, I remember the 80's when interest rates were 20 percent. There wasn't a pundit to be found that thought the residential market would ever see single digits again..ever. The psychology of other market was the 12% barrier and when interest rates dropped to 12% the market started improving.
In the meantime the homebuilders were buying down the rate from 20% to 12%. Today the rates would seem outrageous at 7-8%.
Here is what I base my thinking on:
There are several major industries and those affiliated with them that make their living selling and/or building homes. Real estate brokers, mortgage brokers, home builders, title companies, appraisers, home inspectors, roofers, dishwasher manufactures, painter, and on and on.
Among this group are some of the smartest, most experienced executives and entrepreneurs in this great country. They will figure it out, because they have access to people, money and information. Plus they have stockholders who will insist they figure it out. It is who we are. It why problems get solved.
When greed trumps fear the bubble explodes. When fear trumps greed,there is not enough breath in our economic lungs to get a ballon started. Thats'where we have been and still are, but I am sensing hope.
In the meantime, lets admit we don't really know what is going to happen, and what we all need to do is hasten slowly.
Thanks for writing. It has stirred and should stir more debate.
David Fletcher, Founder
Lic. Real Estate Broker
davidf@newhomesniche.com
www.newhomesniche.com
407.352.5500
407.234.2349
Submitted by Abel Solano on January 3, 2011 - 10:23pm.
"By throwing price appreciation into the mix, it was like adding LSD to the Kool-Aid."
Best line yet ... Keep it coming.
Abel Solano (SFR) REALTOR®
ARG Abbott Realty Group
abel.solano@argsd.com
http://www.ARGSD.com
Submitted by Home Pride on January 4, 2011 - 11:16am.
The "it's cheaper to rent" crowd assumes rents will remain this low forever. Boy, are they wrong...
Homeownership will become "fashionable" the minute landlords can start raising rents again. As folks exit their bomb shelters and re-enter the workforce, there will be intense competition for quality rentals.
Rents will rise and 30-year fixed-rate mortgages will start looking good once again.
Submitted by Ruthmarie Hicks on January 9, 2011 - 11:46am.
In our area, rents are notoriously volatile and can spike up very rapidly and STAY PUT for a long time. Right now the cost of renting vs. buying is pretty much a wash on the basis of cost. Buying is even cheaper in many cases. So you LOCK IN a low rate and STABILITY. My God! If you can afford that DO IT! I don't know what people are waiting for.
Submitted by Chris Somers on January 9, 2011 - 1:20pm.
Agree that in many cases folks may not want to purchase to stay mobile or may not be able to move due to being "stuck" but at the end of the day, I do believe the inherent demand is still there at the end of the day, especially with poplulation increasing and a pent-up demand increasing.
In Philadelphia, we have been as busy as ever. The last two years we have been incredibly busy as first time home buyers keep buying. So the numbers have been stable and resilient. I also think two years from now the numbers will be higher in Philadelphia. Time will tell. Of course every market is different.