Home Ownership?

The Census Bureau recently reported that 62.9% of households owned a home in the second quarter.  That is the lowest level in 51 years, equaling the home ownership rate in 1965, when the census began tracking the data.

Home ownership peaked in 2004 at 69.2%, amid the late and unlamented housing bubble.

Is the reduction in home ownership over the last 12 years a cause for concern?  Perhaps not.

Politicians have tended to aggressively support increased home ownership as a measure of upward mobility.  This enthusiasm has been generously supported by the home building industry.  Government policy heavily subsidizes housing through the mortgage-interest tax deduction, low down payment rules of the Federal Housing Administration, and the taxpayer mortgage guarantees of Fannie May and Freddy Mac.

All of this, together with totally irresponsible mortgage lending practices, brought about a housing boom that turned into a bust.  In 2010, the ownership rate fell to 66.5% and has been falling ever since.

Is this a problem, or is it a manifestation of new thinking about owning your home?

After the end of World War II, with large numbers of veterans returning home, help with an education and with purchasing a home, were intended to provide a whole generation with opportunity and place of their own to start a family and get back to the business of building a nation.

As the economy shifted from war to peace, solid demand for housing led to the perception that buying the biggest home you could manage to finance was a rational approach to building a financial future.

Perhaps that is no longer the opportunity investors once believed.  Recently published research suggests that, on an inflation-adjusted basis, average long term returns were barely more than zero.  Factor in real estate’s heavy transaction costs, that number turns negative.  Over the same period, the real average annual returns for stocks approximated 6%.

A home is valuable as a form of shelter, whether you own it or rent, but the investment potential should be carefully evaluated in the context of individual objectives.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®