The Declining Significance of Home Ownership

In recent generations, homeownership is known as a mainstay part of the American Dream.  Unfortunately, so has ever-increasing complexity in the financing of this dream.  Homeownership 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 homeownership rates in the U.S. than any other modern financial instrument until the creation of sub-prime 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, homeownership is not always in their best interest.  Is there 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 homeowners; it was that too many had people become homeowners through the use of exotic mortgage products. Now that mortgage products have retreated to more standardized underwriting, homeownership 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 (sub-prime mortgages, for example) and foreclosure.

Multifamily owners consider foreclosure on a credit report as a factor when considering a potential tenant, but it is no longer an “automatic” exclusion.  Similar to medical bills that can decimate a credit rating, a single mistake of signing for a  dysfunctional mortgage product no longer exclude an otherwise quality tenant (all other things being equal).   Consider the circumstances, consider the times.

Homeownership 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.

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

One Response

Add Comment