Few icons of the American way of life have suffered more in recent years than homeownership. Since the bursting of the housing bubble, there has been a steady drumbeat from the factories of futurist punditry that the notion of owning a home will, and, more importantly, should become out of reach for most Americans.
Before jumping on this bandwagon, perhaps we would do well to understand the role that homeownership and the diffusion of property plays in a democracy. From Madison and Jefferson through Lincoln’s Homestead Act, the most enduring and radical notion of American political economy has been the diffusion of property.
Like small farmers in the 19th century, homeowners–and equally important, aspiring homeowners–now represent the core of our economy without which a strong recovery is likely impossible. Houses remain as a financial bulwark for a large percentage of families, the anchor of communities, and, increasingly, home-based businesses.
The reasons given for abandoning the homeownership ideal are diverse. Conservatives rightfully look to diminish the outsized role of government in promoting homeownership. Some suggest that Americans would be better off putting their money into things like the stock market or boosting consumer purchases.
New-urbanist intellectuals like the University of Utah’s Chris Nelson predict aging demographics will lead masses to abandon their homes for retiree communities and nursing homes. The respected futurist Paul Saffo predicts that as skilled laborers move from Singapore to San Francisco to New York and London, there is little need to “own” a permanent place. In the brave new future, he suggests, we will prefer time-sharing residences as we flit from job to job across the global economy.
Some of the greatest hostility towards homeownership increasingly comes from the progressive left, some of whom are calling for the total elimination of the homeowner mortgage interest deduction. “The Case Against Homeownership,” recently published in Time, encapsulates the current establishment’s conventional wisdom: that homeownership is by nature exclusionist, “sprawl” promoting and responsible for “America’s overuse of energy and oil.”
Yet for all the problems facing the housing market, homeownership–not exclusively single-family houses–is not likely to fade dramatically for the foreseeable future. The most compelling reason has to do with continued public preference for single-family homes, suburbs and the notion of owning a “piece” of the American dream. This is why that four out of every five homes built in America over the past few decades, notes urban historian Witold Rybczynski, have less to do with government policy than “with buyers’ preferences, that is, What People Want.”
What we are going through now is not a sea change but a correction from insane government and business practices. The rise in homeownership from 44% in 1944 to nearly 70% at the height of the bubble reflected a great social democratic achievement. But by the mid-2000s government attempts to expand ownership–eagerly embraced by Wall Street speculators–brought in buyers who would have historically been disqualified.
In some markets, prices exploded as people moved up too quickly into ever more expensive housing. Housing inflation was further exacerbated by “smart growth” policies, which limited new home construction in suburban areas and instead promoted dense, “transit oriented” housing with limited market appeal and economic logic.
Rather than artificially constraining supply and protecting irresponsible borrowers, we should let nature take its course. Home values need to readjust historic balance between incomes and prices. Over the past 60 years, notes demographer Wendell Cox, it took two to three years or less of median household income to purchase a median-priced home. At the peak of the boom, that ratio had ballooned to 4.6.
The disequilibrium was the worst in regions like Los Angeles, Las Vegas, San Bernardino-Riverside and Miami. At the peak of the bubble, between 2006 and 2008, according to the National Homebuilders Association- Wells Fargo “Housing Opportunity Index,” barely 2% of families with a median income households in Los Angeles could afford to buy a median priced home; even in the traditionally affordable Riverside area, the number was roughly 7%. In Miami, barely 10% could afford such a purchase; in Las Vegas, often seen as one of the cheaper markets, only 15%.
What a difference a market correction makes. The affordability number for Los Angeles is now 34%, 17 times better than two years ago, while Riverside is now near 70%. Miami’s affordability picture has improved to over 60% while in Las Vegas, it’s back over 80%.
These lower prices–not Wall Street or federal gimmickry–will lure new buyers to the places that some new urbanists have predicted will be “the next slums.” Already there’s evidence in places like Miami of a renewed interest in now-affordable suburban single-family homes while condos stay empty or become rentals.
Of course without a return to robust job growth, particularly in the private sector, the home market– and pretty much all mainstream consumer purchases–will remain weak. No matter how low prices get, people worried about losing employment do not constitute a promising new market for homes.
But over the longer run most Americans will seek to purchase homes –whatever the geography. Increasingly this will be less a casino gamble, and more a long-term lifestyle choice. As America adds upwards of 100 million more Americans by 2050, the demand will stare us in the face.
As boomers age, the two big groups that will drive housing will be the young Millenial generation born after 1983 as well as immigrants and their offspring. Sixty million strong, the millenials are just now entering their late 20s. They are just beginning to start hunting for houses and places to establish roots. Generational chroniclers Morley Winograd and Mike Hais, describe millenials in their surveys as family-oriented young people who value homeownership even more than their boomer parents. They also are somewhat more likely to choose suburbia as their “ideal place to live” than the previous generation.
These tendencies are even more marked among immigrants and their children. Already a majority of immigrants live in suburbia, up from 40% in the 1970s. They are attracted in many cases by both jobs and the opportunity to buy a single-family home. For an immigrant from Mumbai, Hong Kong or Mexico City, the “American dream” is rarely living in high density surrounded by concrete; if they wanted that, they could have stayed home.
Over coming generations, changes in family and work life will make single-family homes, townhouses and other moderate-to-low density housing more attractive. Contrary to the anonymity predicted by most futurists, your chosen place is becoming more important, as evidenced by numerous suburban and small town downtown revivals as well as growing local volunteerism.
Equally important, multi-generational households are on the rise back to 1950s levels–in part due to immigrant lifestyle preferences. People are staying put; even before the bubble burst, mobility had dropped to the lowest level in over a half century. With the rise of new technologies allowing for dispersed work, the single family home increasingly houses not only residents, but part and full-time offices.
Barring a long-term permanent recession or a national planning regime aimed at curbing single-family home construction, these factors should lead to a new surge in home buying starting later this decade. It may be too late to save many who overextended themselves in the bubble, but this resurgence could do much to propel our anemic economy, restoring the home to its rightful place one of the cornerstone not only of the American dream, but of our democracy.
This article originally appeared at Forbes.com.
Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History
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Joel, in addition
Your article takes into consideration the current tug-a-war between the faith of the Urbanists and those that want little to do with living in dense cities, the Suburbanists. For well over 3 decades now, I've read articles from experts claiming the death of the cookie cutter suburbs. I can tell you from my back door, in metro and suburban Minneapolis, the housing prices plummeted. In 2006 I did a study of the nations average home prices of a 2,500 sq.ft. new suburban home, and our suburban area was 35% over the national average price of $264,000 at the time. That was for a mass produced, vinyl sided, architecturally deficient home on a bland lot with little attention to efficiency, both from an energy standpoint and a space perspective. What the recession did was bring our housing prices right where they should have been all along - the national average!
That said, comparing the new suburban offerings to the established areas close to the core city (built between the late 1800's, and 1950's) with small individual rooms, terrible insulating qualities, shoehorned in on small lots, well those homes might not have been so special themselves.
What Minneapolis - St. Paul does have that is unique, is a massive area of well kept old neighborhoods of mostly single family homes on lots above 5,000 sq.ft. - about the average size of a suburban development built recently in the south USA. What Minneapolis does have is a huge area of very large upscale homes close to the core city that are close to or adjacent to lakes and creeks with a vast park system interconnected by walkways. There are few areas that are truly downtrodden! The Urbanites complain of suburban McMansions, yet we have plenty of them that are in our urban areas!
My opinion (and I know not all will agree), is that after the recession, suburban builders and developers will need to ramp up their offerings to attract new buyers - this recession was a wake-up call. This does not mean small and cheaply built, but better value with increased livability consuming much less energy. Since the development and building is new this is a very easy thing to accomplish, and since land values have plummeted, the economics make more sense than ever. We have been involved in many such neighborhoods with increased sense of space, terrific pedestrian connectivity, very low environmental impacts, and generous density.
What we have seen slow to mature is builders recognizing that a $30 an hour draftsman is not likely to produce a great home design, and builders are still reluctant to spend a few thousand more on HVAC efficiency and insulation to plummet their customers utility bills. A good architect ($$) can reduce the waste in building through better design, which in theory pays for the extra cost in design. I think that we have seen a big difference in the site planning side of the business because every site is unique, you cannot take site plan "A" and overlay it on the new tract "B". For Architecture, Plan "A" can work on any site - why make an effort to change?
Well, the market is telling the builders - change or fail.
Contrast that to the Urban Redevelopment. The Smart Growth agenda is clear - higher density, higher buildings, walk everywhere, take the bus and light rail, etc. Personally I have no problem with tear down and rebuild, especially since the existing stock of buildings are so energy inefficient. To suggest that people with families will flock to high rise rental units downtown and prefer that to space in the suburbs - well, you must have a lot of faith that people will prefer coming home to that 900 sq.ft. unit 606A, on the 6th floor of a 10 story apartment project after working hard all day, paying a landlord, building no equity of ownership, compared to coming home to ones own home, which at least has some illusion of value.
If I am correct, coming out of this recession, you will see a new era of suburban development, with exciting, open, functional neighborhoods (not perfect, but a huge leap from the past) with energy efficient, low maintenance housing, and if Urban densities explode even higher, I see a very strong future indeed for suburban growth.
Now as a final opinion, if the urban core rebuilds more efficiently with similar density to current conditions but with far more efficient design, then the urban areas would provide a greater sense of space and attract suburbanites back to the core, only then I think the suburbs will be in trouble.
Our current financial situation and housing market is very painful, but in a decade from now it will likely be a faint bad memory, and the dream of home ownership will be just as strong as ever.
I think the argument of
I think the argument of whether to buy a home or not and live the classic "American Dream(tm)" is up in the air at this point. Sure- much has been made over supposed improvements in home affordability across the country. But reality shows that in most major metros prices are still extremely high if using a traditional income to housing cost rule. For example where I live in the SF Bay Area during the bubble homes in the ghetto and far-flung exurbs were selling for $450,000 and homes in desirable and closer areas were pushing $650,000.
The only difference now is that the homes in the ghetto and exurbs are selling for $200,000 and homes in the desirable areas are now at $500,000. Combine the two and the improvement in affordability sounds rosy. But in reality if you live here and don't want to spend your life in a car or in a house with bars on the windows then you're still going to have to shell out a huge sum of money. You'd probably find this in most other major metros. So as far as I can see it things haven't really improved much.
As far as younger people eager to buy houses, well that too is up for questioning. I say this primarily because the more stable, consistent, reliable 9-5 jobs our parents had and only recently started to lose no longer exists. I am in my early 30's and to date have had 7 different jobs not including the burger-flipper/ big box store jobs I had in high school and college. That means on average I basically have to look for another job every 1-2 years. The last time I was unemployed 4 months. I'm not the exception. Everyone I know in my age bracket has the same experience. If I am to buy a house I had better be able to count on having a job. You see my dilemma. This has led me to make the drastic decision to save up a lot of cash and relocate to another state and city where prices are lower, buy a house for cash and not have to worry about having a job to pay the mortgage all the time. Otherwise there is no way I would ever buy a house here. The choice would simply be too risky.
As far as government intervention, well it would seem that getting people into homes has been a major desire of government for decades. The fact that people who buy homes get HUGE incentives not to mention countless bailouts and tax deals when housing markets go sour is proof of this. I assume that this is done because there is an assumption that homeowners make better, more reliably citizens... probably because it forces them to work hard, earn money, and pay off that mortgage. In the meantime they will also go out and buy TV sets, lumber, deep freezers and push brooms. They essentially become money spending machines.
Looking at it in that light its no wonder that the US stopped being a country that manufactures and makes to one that buys and consumes. The idea of buying a house has become so entirely ingrained and branded into people's minds- the "American Dream (tm)" that its seen more as a "right" than merely a financial decision. If I were to ask most anyone I know what their goals are in life, perhaps the top priority is to buy a house. The job they have is merely a vehicle to deliver that outcome. Thus when you're busting your rear for that down payment, who has time for thinking about inventions and innovation? I realize I'm being a hypocrite because I too would like a house someday.But in reality I've rented the same house for 7 years. About 50% of the people on my street are homeowners who have moved in from previous owners in less time than we have rented. Some houses have sold more than once in fact. One has sold 3 times. Yet we rent. But what's the difference? If homeownership was really and truly about putting down roots and becoming part of the community- for what I assume is a lifetime commitment, then how come so many people buy and sell every 4-5 years? If that's the case then why even bother?
Buying versus Renting
The problem with home ownership is the high private transfer tax on real estate, about 10% of the value. With people moving about so much perhaps the advice should return to the old advice that 6-7 years is the minimum you should plan to stay in a place before buying. Assuming a stable price environment for housing that reduces the turnover costs to about 1-1.5% per year.
On the mortgage interest deduction tweak it to allow the deduction only on the primary residence, no deduction on the secondary residence. Note again if you run the numbers it takes a 200k+ mortgage to beat the standard deduction for a couple. Luckily the deduction is capped at $1million of borrowing.
Spot on
Joel,
Good commentary as usual. "What People Want". Duh.
You want to see what people want, then watch "House Hunters". Yes, I know the buyers have been selected by HGTV for good story value, but just the same. Listen to them articulate their desires.
Dave Barnes
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