The lingering Housing Crisis--Changing perceptions of Home Ownership

The Housing crisis has lingered and is clearly contributing factor to the slow growth recovery.  The crisis has defied all of the government’s attempts to fix it. For the reasons discussed below, I think housing is going to continue to be a drag on the economy for several years—far longer than most forecasts.  In addition to the problems of collapsing housing prices—which are showing signs of stabilizing, there is a secular shift that is occurring in terms of the perception of the attractiveness of home ownership.  This perception has been largely overlooked but ultimately will be the source of a continuing drag on the recovery of the housing market even in the medium term. 

Housing used to be a “slam dunk” for most middle class Americans.  The formula was simple:

Shelter+ROI+Tax breaks+30 year mtge+easy credit=JUST DO IT (apologies to NKE)

--Shelter means the provision of the proverbial “roof over your head”

--ROI means the return on your investment since over any 10 year period since WWII housing prices have risen; conventional financial advice found in any money oriented magazine of talk show discussed housing as the "largest asset" of most families.

--Tax breaks means the mortgage interest deduction

--30 year fixed rate mortgage:  unreal, especially with only 10% downpayment

--Easy credit means the proclivity of banks to lend BEFORE the sub prime mess

Really, what was there to think about? 

Contrast today’s situation:

Shelter:  Same—you gotta live somewhere

ROI:  can’t count on it; equity may be at risk!!

Tax breaks:  under threat

30 year mortgage: still the best deal going, but need 20% down payment now

easy credit:  Hold the phone

Objectively, home ownership is just not the no-brainer it used to be.  You can make a good case that renting is better; or at least it is a simple economic decision in a particular geographic market, comparing monthly rent to a monthly mortgage payment plus the implied opportunity cost of the (larger) down payment.  In fact, risk adjusting the ROI on an investment in property, renting would have to be much more expensive to force a rational dispassionate investor to buy a home--even at today's low interest rates. 

 In 1940, home ownership reached a century low of 43.6% (source: Census Bureau & Wikipedia) before growing strongly after the end of WWII to reach over 60% in 1960, only a 20 period. Home ownership peaked at 69% in 2004, and has now declined to 66.9%. (source: US Census Bureau)  This is the largest drop in home ownership in any decade (sic) since 1930s. Home ownership is probably going to decline further before stabilizing, but the question is at what level.

 If the cyclical decline were to equal the depression era decline of 4%, we would be roughly half way through the cycle.  This feels optimistic given the structural challenges of the economy including high unemployment (16% counting under-employment and those no longer seeking work), and low income growth.    If we extrapolate the impact of the changed perception of home ownership to the broader economy, we are facing several years of sub-par  economic growth. 

Sources: Wikipedia and US Census Bureau