We are told that there is a fundamental change taking place in the United States with regard to home ownership. 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.
(For the rest of my article, click the link.)