Chart of the Day: Homeownership over Time

Here are two charts from a recent article in The Atlantic about changing rates of homeownership across different age cohorts and time periods:

homeownership rate chart

[US homeownership rate.]

homeownership age 3

Of course, the tone of the Atlantic’s piece is that homeownership is automatically a good thing, suggesting that “the economy has a Gen-X problem” because they’re not buying homes. While homeownership is automatically a good thing if you’re a realtor, in fact, the US has far higher homeownership rates than other countries. There might be lots of reasons that people don’t buy a house that have little to do with a weak job market.

28 thoughts on “Chart of the Day: Homeownership over Time

  1. Rebecca AirmetRebecca Airmet

    Bill, while I am a huge fan of renting, I have one specific fear about the drop in home ownership. As investment companies have stepped in and bought up distressed properties, they’ve turned into Wall Street landlords, and poor ones at that. A recent City Pages article about this phenomenon in the Twin Cities is a good read. I see this as a potential contributor to widening of the inequality gap.

      1. Matt SteeleMatt Steele

        It is due to low supply of rental housing compared to demand. But we also have an insanely low price-to-rent ratio in our market.

        Price-to-rent ratio = Average list price / (Average Rent * 12)

        Minneapolis is just under a 15. San Francisco is about 30. Portland and Seattle are around 25.

        Usually the cutoff where it makes sense to rent rather than buy is in the 15-20 range, so Mpls fits squarely in the makes-more-sense-to-buy camp unless there are personal/preference reasons that make renting more preferable.

    1. Julie Kosbab

      I think Trulia’s data has some issues. They take out a whole bunch of factors with economic cost:

      – Mobility. Purchase limits mobility and ability to move for a job. Selling a house costs 5-10% of sales price, and depending on equity, down payment and appreciation, if you own a house for only a year or two you take a bath selling.
      – Maintenance. When you rent, you may pay a premium over owning, but you are insured against horror. Roof problems? Furnace goes? Dishwasher starts leaking into the flooring/ceiling below? SOMEONE ELSE FIXES AND PAYS. Home maintenance should be budgeted at 3-5% of home value annually.

      Here is an example:
      If you buy a $100,000 home, with 10% down ($10,000), at 4% loan rate and live there for 5 years, you will pay $17,183.19 in interest and 8,597.24 in principal. Your monthly P&I payment would be $429.67, plus let’s assume property taxes and insurance around $200/mo for a total of 629.67. Let’s also assume you need to maintain your home and the maintenance costs you $125/month (which is low for most homes). Total cost of living there is $754.67 and that is assuming nothing goes wrong or needs replacing that doesn’t fit inside $125/mo.

      Let’s compare that against renting for $800/mo which is “so much more expensive” than buying.

      In five years, if your home value is stable, your loan balance will be slightly over $81k. If you are able to re-sell the house for $100,000, you will owe probably 8-10% in selling expenses, leaving you with $92k to pay off a loan of roughly $81k. So, that’s $11k in your pocket when you sell.

      But wait! Let’s figure in that $10k down payment! So, over 5 years, you grew your net worth by $200/year by owning a home.

      But wait! You had to pay $3,000 in closing costs too. So your profit is actually a loss.

      Now take that rent difference of $45 and multiply that out by 60 months. $2,700.

      In fact, renting was less than $10/month “more expensive” than buying. But when you first looked at the $429.67 payment of buying vs. an $800 rent payment it sure did look a whole lot cheaper to buy. And, as a homeowner, you took on risks of declining home value, maintenance, or lack of mobility. Sure, maybe your home would appreciate… but that’s also a gamble.

      Home ownership is oversold as a dream. You need to be sure you want to live in THAT house for a long time… and even then, it’s not necessarily an investment in anything other than stability which you can absolutely get in a long-term rental without so much risk.

      1. Rebecca AirmetRebecca Airmet

        Julie – another thing to point out about maintenance. “Someone” doesn’t always fix the problem, and the buy-up of distressed properties by investment firms seems to be adding to that problem.

  2. Alex CecchiniAlex Cecchini

    As a person who recently bought a home in S Minneapolis (framing my comment), I think it’s often misleading when you see comparisons of owning vs renting. Many times they only show the mortgage payment, ignoring mortgage insurance (common for young, first-time buyers with <20% down), property taxes, insurance, etc that go into the monthly. They almost never show upkeep costs (paint, shovels, and mowers aren't free) nor long-term maintenance costs (saving up for a new furnace/hot water heater/etc). And no one seems to take into account what even a modest 3.5% down payment carries in opportunity costs.

    Long-term costs when selling (paying 7%+ for RE agents/brokers/staging) are ignored as well. This is a pretty interesting case that takes all those factors over a 25 year period: http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/a-financial-comparison-of-home-ownership-and-renting/article11952272/?from=11952313
    I'm not one to say that a $1,500 rent would be equivalent in size/amenities/location to a $400k house in MSP, so maybe it should be re-calculated with real-world numbers, but there sure is a lot of wiggle room. Of course, once you've owned the place after 25 years, payments drop to insurance/property taxes only and the cash in/out equation rapidly changes. But most families move several times, owning their first 1 or 2 homes for less than 5 years.

    And of course, the costs to society to float this whole boat aren't discussed. Mortgage risk backing (FHA, etc), the Fed buying securities, tax expenditures through property tax reductions (homesteading at the local level and exemptions at state/federal levels) and mortgage interest deductions all have opportunity costs. That money could be better spent in low-income housing programs, transit, or reducing the burden on the general fund and lowering regressive sales taxes.

    All this is to say: owning a home isn't evil. But neiher is renting. And people need to recognize the huge cultural and financial bias we've had toward homeowning in this country since the 30s, and how policies have influenced behavior, land-uses, transportation, and our economy.

    1. Bill LindekeBill Lindeke Moderator   Post author

      Those costs are all the things that freak me out. Like spending a bazillion dollars when you need a new roof or porch or retaining wall or whatever. (not to mention Property tax bills). Yikes.

  3. Rebecca AirmetRebecca Airmet

    I agree fully with Alex and Julie that there are many hidden costs of home-ownership and that it’s an oversold dream.

    However. The data on rent as a percentage of income seems like a more straightforward calculation, and it seems that currently, rents outstrip incomes by a fair margin, even while housing benefits (section 8) are falling.

    So, what I’m coming up with here is that it isn’t that renting is so much more expensive than owning, it’s that they’re both too expensive.

    1. Julie KosbabModerator  

      I think for people who are near an edge, buying is more expensive even when it looks like it’s not. Maintenance risk and lack of mobility are much greater factors in blue collar work than they are for someone like me — I just need to live near a critical mass of agencies or large corporations. Look at how housing values go through the floor when a town is based on a single type of business (manufacturing plant, a mine, etc.) and that business shuts down.

      1. Matt SteeleMatt Steele

        I think one thing we’ve missed out on, with the standard of 30 year mortgages, is that the point is to actually own a home without a mortgage. That’s really the ideal, and something renting cannot touch.

        If people would just buy smaller homes, but make payments towards an early payoff, they could own their homes outright. P&I on a $200k mortgage, at 4.5%, is $1013 for 30 years. But buy a home that’s $50k (25%) less, and the same $1013 will pay off the home in 18 years rather than 30.

        1. Rebecca AirmetRebecca Airmet

          Unfortunately, that standard of owning a home mortgage free isn’t realistic anymore, between stagnant wages, rising home prices, and lack of job stability throughout one’s lifetime.

          1. Matt SteeleMatt Steele

            I realize it isn’t realistic for anyone, but I think it’s realistic for a huge slice of America. Basically anyone buying homes over $300k (whether they can afford it or they only think they can afford it). What would Mr. Money Mustache say?

        2. Adam MillerAdam Miller

          I’m not sure why that’s the ideal, and I can’t really foresee a time when I won’t want the cheap, subsidized leverage that a mortgage provides (okay, perhaps in my dotage).

          1. Matt SteeleMatt Steele

            The ideal is having to work to pay the bills? To not dedicated cash flow instead towards investments that will generate passive income in perpetuity? To not have the freedom and flexibility to do the kind of meaningful life work one wants due to golden handcuffs?

            I realize homeownership isn’t for everyone. But I do think that most people who are homeowners are doing it wrong.

            1. Adam MillerAdam Miller

              Flexibility is nice, but its cost in your scenario is the opportunity cost of having your resources tied up in your house instead of earning potentially greater returns elsewhere.

              1. Matt SteeleMatt Steele

                True, but it is insanely easy to build sweat equity in a home, and it’s much tougher to get that type of return without a property that affords the opportunity. Also, while I see the value in thinking of personal finances like a business, there are differences as well. There’s something that is very liberating about minimizing cash flow liabilities, and the largest cash flow liability is usually rent or a mortgage payment. Some of the benefits are intangible.

    2. Alex CecchiniAlex Cecchini

      There are obviously arguments to be made on both sides of the affordability scale. One is housing costs (whether renting or owning), the other is wages (which in real terms have been stagnant to falling for most of the population for decades). The latter opens up a huge can of worms of economic policy at local, state, and national levels. The housing side is much more encapsulated. Which is why, although I’m happy to talk about wages/etc, it’s much simpler to talk housing policy. It’s more likely that policy changes on that side will have more direct effects on housing costs.

  4. Monte Castleman

    I bought a house in east Bloomington with my sister. Ultimately I didn’t even consider the option of not doing so. No matter what it costs compared to renting, it’s worth it to me. Not just because of the benefits of a detached single family house in the suburbs, and because I can do pretty much whatever I want to it that strikes my fancy, but because I can walk outside and look at it and say “this belongs to me and I’m proud of it” (Just like I take pride in owning a car, as well as the practicality of it- whatever it costs it’s worth it). Maybe not a popular attitude with Millennials, but I’m solidly in Gen X which had more materialistic attitudes about things.

    1. Alex CecchiniAlex Cecchini

      I don’t want to come across as challenging your viewpoints specifically or making any judgments – my wife and I own (well, we won’t actually own it for another 22 years, assuming we make that extra payment each year…) a house. I think for us the biggest reasons were: 1) complete flexibility to customize the interior or exterior whenever we want to (which we can do at relatively low costs via sweat equity thanks to my dad’s teachings), and 2) our options are less limited for some bonus (but not necessary) things like owning pets if we bought a house vs rent.

      But I don’t agree that you can live in a detached single family home in the suburbs because of renting. We’re seeing more and more suburban homes rented out, and without government subsidization of buying we’d probably see even more of it (though maybe not a lot – the economics of renting a single unit with all the maintenance that comes with it is not conducive to the scale of subdivisions built post-WWII).

      I also think the embedded pride many have (my mom/dad congratulated me on “being a homeowner” for example) has very much been social engineered into us over time. Maybe at one point, building your own home (doing a lot of work yourself) with a ton of saved up money really was something to be proud of. But I don’t believe that’s the case anymore. How many people can even fix their own toilet anymore (or, for cars, change their own oil)? The housing crisis proved how incredibly easy it was to get financing of some sort to “own a home” in the past 15 years. I just don’t see the choice of buying as something to be proud about, but that could be my millennial genes kicking in 🙂

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