Home Ownership is Not for Everyone

There is a common misconception that "Homeownership is the American Dream." Unfortunately, the infatuation of that dream caused one of the biggest nightmares in U.S. Economic history. People have to remember that the free market is a powerful thing. There is a very big reason why the U.S. economy almost collapsed because homeownership went from 64% to 70% over a 10-year period led by a big stock market jump and low interest rates. That's only a 6% increase! But remember, that's 6% of the population that shouldn't have had a home because paying their rent was hard enough.

According to Economagic.com, this is the chart for home ownership rates since 1990. As you can see, starting in the mid 1990s, when the stock market started to boom, we were consistentaly in the 64% range or so.

As a landlord, I can't even tell you how many times we lost tenants in 2005-2007 because they were buying homes. On some occasions, our reactions were astounding. Tenants who owed us money were getting qualified for loans to buy houses that had higher costs than the rent. When you pay rent, the maintenance, taxes, insurance, cleaning, etc was all covered in the rent. Sometimes even some portion of the utilities are covered in their rent bill. Once they went to a house, they had to cover all of these payments on top of just their mortgage. This became a bit too much for people to endure, especially when their teaser rate ended and they had to come up with a higher payment each month than what they were first sold on.

During the boom years of the 1990s when the economy was growing at upwards of 6% per year, homeownership was still in the low to mid 60% range. Then interest rates were lowered and everyone thought it was very easy to buy a home…because it was. The only way to give a loan to the extra 6% who wouldn't normally qualify is by lowering standards and hoping prices just keep going up. But like most parties, it had to come to an end. Once prices started to fall, even lower interest rates couldn't stop it. I just refinanced my house in November 2010 for 3.125% interest (7 year lock), which is substantially lower than the rate I got in 2005 when I bought a house. So rates are even lower now than they were back then but look at all the home values…month after month, home prices are declining. 

To recap, there are a lot of great things in life that are not meant for everyone: One of them is home ownership. When things deviate from the norm, there are corrections that need to happen and that will always happen. We are currently in one of those corrections now. Who knows, over-corrections tend to happen…will we see sub-60% home ownership before this is all said and done? That may be tough, but not many thought we would see 70% probably.