There seems to be a long held American belief currently under attack. For over two hundred years, homeownership in this country was a desire of almost every American family. Recently however, more and more people have been pontificating on the fact that owning your own home should never have been held in such high regard.
I don’t want to overstate my concern as I know that the majority of Americans still hold homeownership sacred. Trulia just did a survey showing seventy seven percent of those questioned still believe that owning a home is a part of the American dream. Yet, it does concern me that, while people are being forced from their home due to economic difficulties, some are claiming that homeownership never should have been the goal anyway.
Let me spend a few moments looking at the financial benefits of owning a home.
You may ask why I would make this argument today knowing that housing is in the midst of one of its worst times ever. Well, quite frankly, the last ten years have not treated the homeowner that badly. Obviously, people who purchased a home in 2006 and 2007 have seen their value depreciate over the last two or three years. But, real estate was never seen as a good short-term investment.
If we look at housing values over the last 10 years, we find that even through these tough times real estate has averaged over fifty percent return as an investment.
The chart below compares real estate to other investments over those ten years.
Then why this challenge today? Well, in the middle of the last decade, when prices were appreciating in some areas by as much as 20% annually, many got caught up in the belief that housing values should double every few years for the rest of time. That belief created all sorts of reckless behavior.
Many purchased homes well-beyond their financial means. Others decided that they would gamble on future values and interest rates by taking exotic mortgages to allow them to purchase a McMansion and worry about the cost at some later date. And others used their house as an ATM, withdrawing their equity in the form of a home equity loan, in some cases, on an annual basis.
Previous to this, homeowners realized that a house was a home first and then a pretty good long-term investment. They might have borrowed against the house to put a child through college, finance a wedding, or pay for medical bills.
In the last few years however, people regularly refinanced to buy “new toys” (a new car, a boat, matching ATVs, etc.). Or, if it was for a medical procedure, it would just as likely be voluntary cosmetic surgery as a life saving operation.
I realize that there were some people who were caught in difficult situations and others who got terrible advice from people they trusted. Their current situation is no fault of their own. My heart goes out to those people.
My hope is that, in these difficult times, the same people make sure they get good counsel. For example, I hope people think long and hard before they willfully default on their mortgages. They should try a modification first and, if that is unsuccessful, they should look for assistance in doing a short sale. A short sale will allow them to rebuild their credit more quickly, and enable them to purchase a home again in half the time it would take if they go through foreclosure.
For over 200 years, Americans were eager to purchase property because they knew that on a long-term basis it would create wealth. That concept is alive and well in this country even today. For those who don’t believe this, save this blog post and we’ll revisit it in ten years.
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Homeownership: Still the American Dream