home sales are up, mortgage rates are down and in many places, owning a
home is as attractive as renting for the first time in years.
For generations, owning a home has been a key
part of the lifestyle most Americans aspire to. But when the mortgage
crisis exploded in 2007, it brought down the U.S. housing market — and
the entire economy along with it. The ensuing
recession was an assault on the American dream of homeownership itself.
The tidal wave of foreclosures, the crash in home prices and tighter
lending standards have left some Americans unable or simply too nervous
to buy a house.
In the wake of the housing
crisis, a flurry of media coverage has trumpeted how Americans are
rethinking homeownership. Pundits asked, "Is renting the new owning?"
and a September 2010 Time magazine cover proclaimed, "Why owning a home may no longer make economic sense." But has renting become "the future of home-dwelling" in America, as one cable news reporter posited?
As Mortgage Rates Fall ...
Monthly rates, in percent, for fixed 30-year mortgages
May 2012 figure is for the week of May 31.
Source: Freddie Mac Credit: Nelson Hsu / NPR
In a word: no. Five years after the market crash of 2007, the desire to own a home is actually very much alive and well. In a recent poll
of likely voters by the Woodrow Wilson Center, 84 percent of
respondents said homeownership today is just as important as or more
important than it was five years ago. Ninety percent still think
homeownership is part of the American dream.
'Living The Dream' At
a kitchen table in the Boston suburb of Sharon, Mass., 11-month-old
Lilah Medeiros is eating mashed potatoes and making elephant sounds. Her
parents, Jared and Emily Medeiros, are in their mid-30s. Both work in a
museum, and both are first-time homebuyers.
Is It Cheaper To Rent Or Buy?
In 1989, the annual cost of owning an
average home nationally was nearly double the cost of renting an average
apartment, as shown in the index below. Now, the costs of owning and
renting are nearly the same, according to the index compiled by MIT
economics professor William Wheaton.
Actual costs vary by market. The
payment/rent ratio is derived by multiplying the mortgage interest rate
times the average house price, then dividing that by the average
apartment rent. The index does not account for the "opportunity cost" of
making a down payment on a home (as opposed to investing the money),
and also assumes no house appreciation and no interest deduction.
Source: MIT Center for Real Estate Credit: Alyson Hurt / NPR
"We got a nice front yard, backyard, side yard — two side yards," Jared laughs about the family's new digs. Emily
loves the family's new space. "[Jared] does some woodwork stuff. He can
do his projects on the weekends, and I can do some gardening," she
says. "I do feel like we are living the
dream. We've said it a couple times since we bought the place," she
adds. "This is what you always picture — having the space to do this
stuff — and now we do." Around the country, young families like the Medeiroses are buying homes or condos in the city as well as the suburbs. That desire to own a home, and one's own piece of land, has deep roots in the American psyche.
A Dream With Deep Roots The
term "American dream" became popular in the 1930s, says Bob Shiller, a
housing economist at Yale. "But I associate it with the suburban
movement that developed after World War II," he says. "To
me, homeownership at that time represented kind of a community spirit.
We have neighbors, we like our neighbors, we're active in the
community," Shiller says. The American tradition of actively encouraging home- or farm ownership dates back even further, he says. "That
was the real American dream — [owning] your own farm. So we had the
Homestead Act in the 1860s that made it possible for anyone with modest
means to buy a farm," he says. Still earlier, the French historian Alexis de Tocqueville noted the importance of homeownership in his book Democracy in America, published in the 1830s and based on his travels around the country. "He
noticed the independent streak of Americans and their desire to own
their own farm and their own home," Shiller says. "He thought that that
represented a kind of anti-feudal feeling — that each person in this
country is an independent agent. There is no landlord or lord with his
thumb on you." That American dream arguably
became pretty warped during the housing bubble. Buying a house meant
making big money fast. There was a frantic rush to buy as prices rose,
and McMansions sprang up as people used the equity in their homes to
move into bigger houses than they needed. "It was a different spirit," Shiller says of the boom times. "It was not the same American dream." Buying More Attractive Than Renting
and Emily Medeiros purchased their Sharon, Mass., home when they
realized it had become more affordable to buy than in recent years.
Today, some might argue that people like Jared
and Emily Medeiros are returning to something healthier. The homes on
their street in Sharon are well-kept but modest. Many are ranch houses,
spread out with nice, big backyards. There are no new McMansions in this
neighborhood. "Most of these ranches were
all built in the '50s, so it's ... like a turnover right now," Jared
says. "Either the people are moving to Florida or dying or selling their
house. And a lot of couples our age with kids, first-time homebuyers,
are buying up all the houses around here. You can totally see it. Just
lots and lots of families." The couple says
they didn't buy expecting to get rich from rising home values. They
simply did the math and decided that, by owning, they could get a lot
for their money right now. The couple paid
around $250,000 for their home — less than they would have paid a few
years ago for a nice house not in need of major repairs. Home prices are down about 30 percent on average nationally. Interest rates are super low, while rents are rising. "We're
almost at a historic opportunity, in terms of the cost of owning
relative to renting," says William Wheaton, an economist at MIT. "It's
hard to think of a time in the last ... two or three decades when it's
been as good to buy as right now." Public Policy A Key Factor Still,
Wheaton says, many of the financial benefits of owning a house are a
result of government policy. The government has a hand in making
mortgages available and affordable, in part through the mortgage
interest deduction for homeowners. Those kinds of incentives are a big
reason that 65 percent of Americans own their homes. The
opposite is true in countries with different policies. Switzerland, for
example, has the lowest homeownership rate in the developed world,
In recent decades, the dream of economic mobility has faded for many Americans.
That's not because the Swiss particularly love
renting, he says. It's just that the economic incentives in that country
push them toward it. The tax structure there favors renting: It's easy
to get long-term rental leases, and loans are harder to get. As
a result, "only 35 percent of the population of Switzerland owns their
home," Wheaton says. "And Switzerland is a very affluent little
enclave." The relationship between policies
and behavior should be of interest to American policymakers. Over the
next few years, Congress will be restructuring the government's role in
the housing market. Those changes could have a significant impact on
that key element of the American dream: owning one's home.