The Trap of Home Ownership

With the housing crisis still in full swing, there is an on-going debate emerging about whether it is feasible anymore for the “American dream” to be realized. The term has many meanings. In the definition of the American Dream by James Truslow Adams in 1931, “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement” regardless of social class or circumstances of birth.

For many the American dream is ownership of a home. “Owning a home lies at the heart of the American dream.” So declared President Bush in 2002, introducing his “Homeownership Challenge” — a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups.

It would seem that the U.S. should top the list, but it does not. According to NationMaster, http://www.nationmaster.com/graph/peo_hom_own-people-home-ownership the U.S. falls to seventh place in the world, behind even its closest neighbor, Canada.

The housing bubble that burst in the U.S. has crippled the economy in many ways. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to RealtyTrac. The firm estimated more than 1 million American households were likely to lose their homes to foreclosure last year.

Among states, Nevada posted the highest foreclosure rate last month, with one in every 84 households receiving a foreclosure notice. That’s 4.5 times the national average.

Rounding out the top 10 states with the highest foreclosure rate in August were: Florida, Arizona, California, Idaho, Utah, Georgia, Michigan, Illinois and Hawaii.

Foreclosures…one every 13 seconds.. are contributing to a growing housing supply that may add as many as 12 million homes to the U.S. market.

The blame game continues as to who was responsible for this mess. First it was the Bush administration…then it was easy lending by banks to those whose income could not justify the rising cost of home ownership… finally, it was the belief that home ownership was preferable to renting in many cases, especially when the ownership term is expected to be at least several years.

I’ve been reading Walden Pond, by Henry David Thoreau (1817-1862). He notes in his introductory remarks http://thoreau.eserver.org/walden1c.html the following:

“When I consider my neighbors, the farmers of Concord, who are at least as well off as the other classes, I find that for the most part they have been toiling twenty, thirty, or forty years, that they may become the real owners of their farms, which commonly they have inherited with encumbrances, or else bought with hired money — and we may regard one third of that toil as the cost of their houses — but commonly they have not paid for them yet. It is true, the encumbrances sometimes outweigh the value of the farm, so that the farm itself becomes one great encumbrance, and still a man is found to inherit it, being well acquainted with it, as he says. On applying to the assessors, I am surprised to learn that they cannot at once name a dozen in the town who own their farms free and clear. If you would know the history of these homesteads, inquire at the bank where they are mortgaged. The man who has actually paid for his farm with labor on it is so rare that every neighbor can point to him. I doubt if there are three such men in Concord. What has been said of the merchants, that a very large majority, even ninety-seven in a hundred, are sure to fail, is equally true of the farmers. With regard to the merchants, however, one of them says pertinently that a great part of their failures are not genuine pecuniary failures, but merely failures to fulfill their engagements, because it is inconvenient; that is, it is the moral character that breaks down.”

Thoreau believed in living frugally…the land for his cabin was funded by Ralph Waldo Emerson who offered him free use of his woodlot along the northern shore of Walden Pond. Thoreau began planning for his 10′ by 15′ house in March. The frame went up in May. And he was ready to move in on the 4th of July. The interior of the house was furnished with a bed, a table, a small desk and lamp, and three chairs — “one for solitude, two for friendship, three for society.”

Last February, my wife and I finished paying off the mortgage on our home. Newly built back in 1970, the cost was $25,000 for a modest ranch style house with attached garage and basement. However, raising a family of eight, holding jobs in private and public schools, and engaging in investing in the cherry industry by new plantings five years after the house was built, the debt load on our house had risen to six figures. Simply put, it took us 40 years to become debt free and own the house unencumbered.

I did a little calculation on the cost of a mortgage on a new house…a very modest $210,000 one, indeed. Quicken Loans advertises a 4.5% 30 year fixed loan for a monthly payment of $1064. That’s a total payment, over 30 years, of $383,054, of which $173,054 will be paid in interest.

Consider how much of a mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:

Years % toward interest
0-5 ~80%
6-10 ~70%
11-15 ~60%
16-20 ~50%
21-25 ~35%
26-30 ~10%

Also, homeowners must pay property taxes, homeowner’s insurance, and maintenance costs. Renters pay a fixed amount each month.

If a young married couple buys the above home and one loses employment, will they be able to continue to make the monthly payment? If one or other is promoted to a job forcing a move, will the present home be able to be sold in a timely fashion? Will the other spouse find a job in the new location? What about buying a home in the new location? What about the cost of having children?

There are countless variables involved in home ownership. Recent anecdotal studies have shown that, on average, investment in the stock market over a 30 year period will yield a higher return than investment in a home. In a mid-July article in the Wall Street Journal, Robert Bridges concludes that owning a home is a “lousy investment.” http://online.wsj.com/article/SB10001424052702304259304576375323652341888.html?KEYWORDS=Robert+Bridges

So is renting a better choice? If one is only interested in money, probably. If one is willing to gamble on the uncertainties of life, does it become an issue of morality?

Consider the hypothetical case of a young couple with two children who purchased the above home. Over a four year period they owned the home, the bank has received $57,000 plus a hefty down payment. They still owe $197,000. $13,000 has been applied to principal and $44,000 to interest. Property taxes and maintenance have taken their share. Let’s say one spouse lost a job recently, and the couple is expecting their third child. It is becoming impossible to maintain their mortgage payments, and the bank may be encouraging them to miss payments and go for a short sale or something short of foreclosure. No matter what happens, all things being equal, the bank will come out ahead, in my opinion.

I think you can see where this is leading. The couple’s credit scores have dropped to the point where not even a $50,000 mobile home can be financed. Their only option appears to be renting.

Maybe that’s going to be the wave of the future and the American dream of home ownership will go the way of 300 hp autos and gas-guzzling SUVs.