In the last two generations home ownership has become a mainstay part of the American Dream. Unfortunately, so has ever-increasing complexity in the financing of this dream. Home ownership is a privilege, not a right. This privilege is open to most willing to sacrifice savings (down payment dollars) and sign a long-term note (mortgage) to finance the balance of the purchase price. The “invention” of the thirty-year mortgage did more to increase home ownership rates in the U.S. than any other modern financial instrument until the creation of subprime mortgages. Alas, progress is not always forward. Most people today know that your principal residence is not an automated teller machine to be tapped for every whim.
As many families have learned in recent times, home ownership is not always in their best interest. Is there really such a thing as “negative equity? Yes. There are scores of people wishing they did not know the definition. When the percentage of the population owning homes was peaking at seventy percent, foreclosure rates were soaring. It wasn’t that too many people had become home owners, it was that too many had people become home owners through the use of exotic mortgage products. Now that mortgage products have retreated to more standardized underwriting home ownership will return to its historic norms of around sixty-seven percent of the population.
As the home ownership bell curve returns to normal this will increase the renter pool along with favorable demographics and, for some, an inclination to remain as renters for life having been stung by various financing instruments (subprime mortgages) and foreclosure. Multifamily owners should consider foreclosure on a credit report as a factor when considering a potential tenant, but not use such as an automatic exclusion. Similar to medical bills that can decimate a credit rating, a single mistake of signing for a dysfunctional mortgage product should not exclude an otherwise quality tenant (all other things being equal). Consider the circumstances, consider the times.
Home ownership is a worthy pursuit. Families should consider the nature of the commitment and affordability when considering a purchase, using prudent levels of leverage and considering sustainability. It’s not for everyone though. Renting as a lifestyle choice will continue to be a consistent alternative for nearly one-third of the population.