Home Ownership for Young Americans Is Falling. So What?
We are told that there is a fundamental change taking place in the United States with regard to homeownership. This is nonsense, and the sooner you figure this out, the better.
We are told that home ownership in the United States peaked in 2004 at 69%, and is now down to 65%. This represents a marginal change. Economic conditions are different, but considering the minimal shift in there percentages, we should not take any of this seriously. But it makes for great headlines.
What about young families? We are told that peak home ownership for people under age 35 reached about 45% in 2004. It is now down to about 35%. This is a 10 percentage point drop, or 22%. This is not small, but it is not serious.
The important aspect of home ownership is not the potential profit that most families enjoy. The important thing is this: it is a system of forced saving. Young people buy a home, they sign a 30-year mortgage, and they move in five years. They are just like everybody else. Few Americans stay in the same home more than about five years. So, the person takes whatever equity he has from selling his home, which in five years is probably not very much, and he uses this equity as a down payment on the next house. He keeps this up, half decade after half decade, and at the end of his life, he has some money saved. But the money is worth only a fraction of what it was when he bought the first house. He has also spent a lot of money in keeping these houses in good shape. Houses on average are sinkholes for money. People don't keep track of how much money they are really spending, unless they are buying the home as an investment property. But people who buy homes as investment properties are few in number, and they don't sell homes every five years.
When you consider the transaction cost of selling a home, which is in the range of 6% because of real estate commissions, selling a home every five years is a really bad idea. It eats up your equity. If you bought the home with a 30-year mortgage, and you kept the home is an investment property, and you get the renters pay off the home, then you have made an exceedingly wise investment decision. But this is not what the vast majority of Americans do. They sell the home that they are moving out of, because they want to move up. They want what little equity they have received out of the home to serve as the down payment for the next home, which is more expensive, in a better neighborhood, and is larger. In other words, this is not an investment; this is a consumption good. They are using a home as a way to buy status. This goes back about as far as men have been married, and wives have wanted to move up. Men also like status, and housing is a way of getting it. But let's not confuse this with investing. Investing is where you buy a starter house, and you never sell it.
The fact that some young people under age 35 have decided not to buy houses is important for this reason: they probably will not accept a forced savings program. They should use their money to buy a home, and then never sell the home. They should move out after five years, not for reasons of status, but because they can get a government-subsidized loan: a family mortgage. The government owns Fannie Mae and Freddie Mac. It subsidizes mortgage rates: low. They should use the home they bought as a starter home as an investment property. This is sensible investing. But this is not what most people do.
Young people who live in areas in which they cannot afford to buy a home are making a mistake, to this extent: they could have begun to develop equity by purchasing the first home with a 30-year mortgage. That is a tremendous opportunity missed. But they were going to miss it anyway. They were not going to use the property as an investment property. They were going to get on the treadmill of social status, buying ever larger houses in ever nicer neighborhoods. At the end of 40 years or 50 years, they would own a house too large for an elderly couple, which they would live in until forced out by financial conditions. All in all, home ownership will have done them very little good. It was at best a forced-savings program.
Young families that rent will wind up with no equity. But they will probably buy at some point. They will overpay. They will stay in an area in which real estate investing is not a good strategy. What they should do is to find a region of the country, such as the Midwest or the South, where a young couple can move, buy an inexpensive house, and then buy a series of houses to build up equity. That is the way to build capital for the future. That is the best possible forced savings program. But they are not future-oriented. They are young, and they think they will not be suffering when they are old. They don't think about the necessity of systematically saving for the future. They do not understand real estate investment guru Jack Miller's principle: "The best way to become a millionaire is to borrow a million dollars, and pay it off." You get renters to pay it off.
When you're young, you can locate in an area with a low cost of living and cheap housing. You can scramble around and find some job. Then you work your way up in the job, and you start investing in rental houses. This is the way to get rich. But young people do not see this. This is why the opportunity exists for a handful of young people. They will not decide to live in a region because they can get a middle-class wage temporarily. They will move to an area where there is a long-term potential for real estate investing, and they will take whatever jobs are necessary to enable them to get that first home.
I realize almost nobody will take this advice, but it is the best advice I can give.