Is Home Ownership Still the American Dream?

Over the last couple months two long-held truths of the financial world have been turned on their heads.  One, money market mutual funds can’t lose money, and two, the value of real estate always goes up.  Unfortunately, many have discovered neither of these “truths” have ever been 100% true, just assumed.  And you know what assuming does.

Has the American Dream Been Oversold?

For years the “American Dream” has been to own your own home.  The notion itself is a little absurd.  After all, you never really own your home outright.  Don’t believe me?  Try not paying your mortgage for a couple months.  But you own your home free and clear you say?  Well, try skipping out on property taxes this year.  No, we never really own our homes completely free of any obligation.  However, to a lot of people “owning” a home represents the pinnacle American financial experience.

Realtors and Brokers and Politicians, Oh My!

So who has been perpetuating this idea that owning your own home would somehow complete you, financially?  Realtors have certainly played their part.  Let me make clear first, I am a fan of realtors.  I think there are some truly great real estate agents out there who have their buyer’s (or seller’s) interest at heart.  But I think there is an even larger number out there who signed up clients for mortgages they knew they couldn’t afford, and did so by conspiring with banks and mortgage brokers to work “creative financing” for their clients.  In other words, since the buyers couldn’t qualify using standard mortgage practices they had to “get creative,” which led to a variety of bad loan options such as adjustable rates and  interest-only loans.

So realtors and banks played their part, but the government isn’t off the hook.  For the last two decades administrations have pointed to increases in home ownership as evidence of a strong economy, and a happy citizenry.  The Clinton administration called for increased loan options for lower-income families, particularly those who did not have funds available for down payments.  Bush furthered the problem by calling for an “ownership society” early in his first term.  It seems both administrations were caught up in the idea that home ownership was a proper measure for our fiscal health.

We’ve now discovered many homeowners would have been better off continuing to be renters.  Despite what others tell you (particularly those associated with the real estate industry), renting is not the equivalent of “throwing money away.”  Renting a house is a viable option for providing safe shelter for you and your family.  There should be no shame associated with it, and in fact, in many cases it is much smarter to continue renting than opting to buy real estate.  After all, a house is just sticks and bricks, but a home is where you make it.  And it doesn’t matter who holds the mortgage on that “home,” you or a landlord.

Often times mortgage brokers run numbers and say things like, “Well, for the same amount you are throwing away in rent each month, you could be making a mortgage payment!“  Unfortunately, the real world tells us that rent and mortgages are not equal, in terms of the financial risk associated with each.  If you buy a house with no emergency fund and the hot water heater bursts sending gallons of water over your flooring, guess who gets to pay for the cleanup and repairs?  If that same scenario happens in a rental home, your landlord is on the hook for necessary repairs.

Owning a home is still a worthwhile goal as real estate prices do typically increase over the long term.  However, it’s best not to jump into home ownership solely for the investment potential.  Leveraging too much of your life by over-buying a house can wreak havoc on your family’s finances for years to come.  Renting has its downsides as well, but they are typically more inconveniences (fluctuating payment amount year to year, having to move if owner wants to sell or reoccupy, etc.) as opposed to the uglier potential negatives associated with mortgages.  Can you say “foreclosure?”  So, if you are in position to buy a home, make a frugal purchase and enjoy your new humble abode.  If you are not in position (no down payment, no emergency fund, etc.) then simply rent a space and keep plugging away at building savings–no shame in that game.

Comments

  1. We rent, but we want to own. My thought is that the advantage of a paid off home if you can attain that in some way is that when you are older your income drops and if you have a paid for home you can almost always afford to stay in it.

    We used to own homes in the past but after several years of on and off unemployment just after 9-11, we had to sell and move across country. Now we want to own but not with a big mortgage. We have been looking and trying to find some way to do this with our savings.

    If you rent in old age–you will pay more to live in the home I think than you would if you own without a mortgage and only have to pay taxes.

    In that one respect we think ownership is better–that and you don’t need ‘as much’ permission to do what you like in your own place–you still need permits from government, but at least you don’t have a landlord.

    Make sense?

  2. Property taxes are not you “paying” for your home. They are you “paying” for the services and facilities provided in your community. If that is such a burden on you, then rent, but please stay out of my neighborhoods! It’s people with this attitude that cause our school and roads levy to fail.

  3. @OneLoveTwoAccounts: I never said property taxes paid for my home, rather property taxes are levied against my home by the government, and if I fail to pay them, that same government can come take my home. I was making the point that you don’t really own anything in this country as long as it can be taxed.

    And no, I’m not the kind of person that causes schools, roads and levies to fail–those would be bureaucrats who have spent tax payer’s money on government bailouts while ignoring basic improvements to our infrasture.

  4. From our experience looking for a home we could afford to buy without a mortgage–its really getting very hard to ever afford that dream. Still plugging along but I agree with Frugla Dad– you never really own it if someone else can take it.

  5. Assuming you are a gainfully employed worker, you will actually see your wages garnished before your home is taken for property taxes. So, the actual asset isn’t take until there are *several* thousand dollars of debt levied against it. I don’t know how long that would take where you live, but it would be years in my area for the total to be tens of thousands.

    While I can agree with your opinion about government wasted spending, that is not the cause of levy failure. It is the exact sentiment you expressed (that is, the same bureaucrats who over spend in other areas will “get” the money from a levy), and the lack of education about the workings of a district/precinct/county appropriations system that causes the failure. People assume they know where the money will go instead of learning who will handle it. Those same people express negative sentiments to large communities – where many people have different local rules than that person – and so something with many positive uses (like property taxes) obtains a negative connotation in the minds of many people determining its future.

    Also, I think the big thing I didn’t articulate in my first statement is this: If one chooses to pursue home ownership, one must be prepared to take a GENUINE INTEREST in the impact that will have on the person and they will have on the community of their home. Owning is a commitment for the whole time you are in the property. It seems when people talk about an “American dream” they expect it to go from a reward to a “right”. Once something is considered a “right”, it has to be simple enough for everyone to participate. I do not think that will ever be the case of home ownership.
    Final, thought (or ramble, however you prefer): we pay maintenance on our cars, yet we consider them something we own. I often refer to “my community”, so I guess I consider the property taxes the “maintenance fee”. We are looking at moving to the community in which I coach, where we would also pay an additional income tax to the city as well as higher property taxes. To me, this is “worth it” if I feel I get a better community. It just requires more maintenance.

  6. Wow! Are you psychic, FD?

    I just put an offer in on a house yesterday. The timing of this post is scary.

    I agree with what someone else said above, a house with a paid off mortgage is (or should be) the “American dream.” I am purchasing the same exact floorplan, 1265 sqft, that I sold 4 years ago. The offer I put in was over $100K less than I sold my home for. For the first time ever, my wife and I are talking about getting a 10 or 15 year mortgage! I never thought we would be able to take anything other than a 30 year loan. I did not get “creative financing” before and I will continue to listen to my father by getting only a fixed rate loan yet again.

    Anyway, I saw this post and couldn’t help but comment.

  7. If the criteria to really owning something is that someone can take it away from you, then you don’t really own anything do you? Try not registering your vehicle and getting it inspected every year — it gets impounded soon enough. Try not paying your property taxes — the local gov. will take it away eventually. Your clothes and food can be stolen right out of your home. Try getting the insurance company to cover that — it’s usually not going to happen. To say that something which can be taken away is not owned, I would have to disagree with. Property is only “ours” to the extent which is defined by law. Just be glad we don’t live in a communist nation like Cuba. They don’t get to really “own” anything. Heck, if they go to the “free” universities over there they are mandated to work for the government for four years. Try that one on for size.

    I will just say this about home ownership — it is a PRIVILEGE and not a right. There are plenty of apartment buildings, rental houses and shelters where people can live. If anyone says that “that isn’t good enough”, just drive over to South California and take a peek over the border there at the Mexican citizens who live in corrugated tin shacks with barely running water. Let me know if you’d like to take that as a housing option. Even the poorest among us in this country have it much better than in other countries. There are plenty of housing options available and everyone should consider that owning a home is something to be earned and not given. Too bad there are sooo many suckers out there who think that they have to do something that they cannot afford. If you allow it, you can be taken advantage of by almost anyone. Unfortunately, they haven’t found a way to make a pill for common-sense.

    I have a home. I worked hard to get it as it was a goal that I wanted to accomplish in my life. I am proud to maintain my home and make sure it is a nice and comfortable place to live. My wife and I thought long and hard before buying a home and it was not a decision we took lightly. I would feel just a little slighted if anyone decided to just “give” someone else a house who put no effort forth for it.
    To those who may disagree, please read this article first — it appears that things that are given are not appreciated very much in the long run even when the receivers are in definite need.

    http://tinyurl.com/5qgs7o

  8. Your home should be the place where you live, not an investment. I bought a modest(1100 sf) house that suits my needs and I could afford without worry. It will be paid off soon.

    @Paul. If you can afford the shorter mortgage, go for it, it will save lots of money long term.

    Even when it is paid, there will be expenses for upkeep, insurance and property taxes. But it will be cheaper that renting for me. If you rent, the landlords property taxes are figured into your rent. Taxes are a part of life.

    I think owning a home can still be the American Dream. But, it is best if you work for it and do it wisely.

  9. I don’t think home ownership is absurd unless your primary motivation is fiscal investment. Sure, the house and land are a financial asset, but it should be much more than that too.

    And while the nation’s financial environment is shaky today, home ownership (at least for most of us) isn’t a short-term proposition – to get anywhere without stumbling, you’re better off setting your eyeline on the horizon, not at your feet.

  10. When I’m talking about owning being something someone can’t take away–what I mean is that if you own it– then you don’t have to worry if you lose your job or your income decreases with age–you will also lose your home.

    That is a situation that is becoming very familiar to many of us.

    I think the talk about losing a home for back taxes is a distraction from the real question here– which is
    Is it worthwhile to buy a home?

    I’m not sure myself. If you pay all the interest and taxes and maintenance and etc and then the value of your house goes down– you might well have been better off to rent.

    BUT– when you look at owning a home outright–without owing payments on it anymore–then you have a thing that has value because you won’t get kicked out of it.

    I hope we don’t have to pick at the way things are worded and instead look at what is really the question–is it worth it or not?

  11. Well, if a house is paid off the question of taxes is still relevant. Where I live, I have a house valued at approximately $180,000. My yearly taxes went up this year from about $600 to almost $900. Paying that amount in taxes is not difficult and quite doable even if I didn’t have a job or whatever. Now in places where the tax rate would be upwards of $10,000 for a house like that, it would be a different story. Paying almost 4-6% of the value of the home basically means that you are either making much larger mortgage payments (if it’s not paid off) or practically paying a mortgage for 4-6 months of the year anyway (if it is paid off). People who purchase houses in districts where the taxes are high have much more to consider than just affording the mortgage and maintenance. In my case, I felt that it was worth it for me to buy a home.

    On the subject of house valuation, everyone’s houses are going up along with your own so you really don’t make any money. Unless you got into a fixer-upper or bought in a place that is now extremely popular, then the money that appreciated will have to go into buying another home. There are a few cases where this can work out differently, such as when children leave and you want to downsize, building your own home, or moving in with someone else and cashing out the equity. Of course, this basically just works out to paying yourself since the money in your home is basically what you paid into it.

    Oh and by the way, there are plenty of places in the ol’ US of A that did not have housing market crashes. My house in south Louisiana has appreciated by about 4-8% each year that I’ve lived in it and it is still going up. If I hadn’t heard the news screaming about greed, foreclosures, and inequity I really would not have known anything about it.

  12. I believe owning your own home is still the American Dream because you still get that great feeling of actually owning your own home instead of renting it. It is like everything else, if you don’t own something, you don’t get that great sense of accomplishment

  13. So funny that you picked a picture of the most beautiful home ever. Yes that house is my American dream! But we have a modest house, in a good neighborhood, near good schools, with a payment that we can afford that we are working on paying off. So I guess we’re doing OK.

  14. @DavidK – You mentioned that things that are given are not appreciated very much. From my humble experience recently in organizing a fundraiser for a local family in need I found it not to be so. When I reached out to the community I got close to 30 people who helped me identify the resources that this family could use for free food, housing assistance, etc. and 12 of those people mentioned that they themselves had used those resources and were extremely grateful for them for helping them through hard times. I know it isn’t a national study or anything but it was local to me so that is more meaningful for me.

  15. Let’s make it a little more clear here. There are several types of mentalities people can have when getting things for free:

    1) The most destructive is the type of person who EXPECTS something to be given to them for nothing. When they get it, they feel that they deserved it (despite however inappropriate those feelings may be) and so have absolutely no respect or thankfulness for the item or for what was sacrificed for them to get it. These sorts of people are quite numerous and unfortunately tend to speak the loudest.

    2) There is then the type of person who thinks that they are not deserving of it but take the thing given to them anyway even though they may not need it. They also tend to be less respectful of the effort but are many times quite appreciative of it. They may usually give the item to those in the next group.

    3) The one we all like to give to are those who need it and think that they haven’t earned it but still get it anyway. These are the types of people we want to help by giving them food, shelter, and other assistance. They tend to be the most appreciative and are very very grateful for anything that they may get. They may also feel guilty for living off of someone’s good will and may try to show their appreciation in some way once they get back on their feet.

    I don’t know about you but I tend to feel pretty good when I give to those who appreciate it and are humble about it. To those who EXPECT it, I can just say that I’ll give them a quarter to buy a six-pack of humility-in-a-bottle from Wal-Mart before I speak to them ever again. Having been in both positions (in need and giving out) I tend toward the 2nd and 3rd type depending on the situation. I’ve also helped out many people as well and have seen all types. We’d all like to think that everyone we help falls into the 3rd category, but many are in the first 2.

  16. @Danielle, I had to laugh when I read your comment. The first thing I thought when I saw that picture after reading the title, “Is Homeownership Still the American Dream”, was, “not in that house”! I love how our diversity of taste creates lovely neighborhoods of different styles of homes. I’m a bungalow girl myself. The ability to buy my home 5 years post-divorce was hugely symbolic to me. I’d do fine if I had to go back to renting but I’m happy to live in my “own” home.

  17. great to read this article.

    My parents grew up renting everything… the house, the TV, the VCR. It was a mentality I picked up, even though I was well paid. I think that mentality stopped me from buying numerous times over the years. But now I’ve been working for 15 years, moved from NYC to Seattle, and the money that wasn’t enough for a down-payment in NYC, gets us a nice house in Seattle.

    This month, finally, I am buying a home. I’m the first person in my family ever to buy a home. Yes, it is a dream. I just hope I can keep my job and keep the dream alive !

  18. Mr. Urbanite and I just bought a foreclosure in excellent condition for about 60% of the original price of the house. We figured we could keep absorbing the $100 rent increases each year OR we could make the leap to buying and have a mortgage payment that wouldn’t increase.

    I agree that ‘investing’ in a house is a poor idea. Housing markets fluctuate, repairs are needed, taxes go up. If you’re not planning on living in the same house for decades, I really do think renting is a better option. On the other hand, if you plan to make your house your permanent home, I don’t understand why you’d want to rent for the rest of your life.

  19. I think the one thing left out so far is peace of mind…security…a settled for life feeling. That’s what owning my own home, mortgage free, means to me. I can live here til I die – I am settled for life. My happy colors, my scrapbook and sewing nooks, my counterspace, the nooks and crannies, the weird little attic, the small yard with rich fertile soil and the abundant garden, the woodstove for the power outages. I dreamed it all up and had it built for me. My dream.

    This is my survival, my ability to be frugal always, my ability to take care of myself, that no one can take away from me, and I sleep well at night because of that. This humble home and small lot makes me a producer, not a consumer, able to get by without spending much $$.

    I do not consider this an investment – I do not worry about the ups and downs of the market… This roof is over my head no matter what the market does. Til I die or health forces a move out. The little old man who had the house before me died in it – that’s what I hope also happens to me…just to wake up dead one morning would be an ok way to go :) This house is a mindtrip – settled forever :)

    Here the property taxes can go 4 years before a tax lien is placed on the house, another year til a foreclosure. The dollar amount doesn’t matter – just the number of years you miss your tax payment. For $775/year property taxes, if I were to become unable to pay that, I am sure my kids would pay it before losing their inheiritance equity in the place – they’re all smart kids!

    PS – love that photo. At one time that would have been my dream home, but at 50 something, it would be too hard to paint that house myself… and yes I painted my entire house inside and out…and saved a LOT of money in the process. Again, to be able to do for myself – that’s the biggee!

  20. A house is a THING. It is a THING with a wooden frame, some dry board walls, a concrete foundation, and maybe some bricks outside to make it look pretty. It can go up in flames, be destroyed by an earthquake, be flooded, or blown away by the hurricane, be seized by the government for a whole bunch of different reasons, plus the various parts of it wear out, and it requires plenty of maintenance.

    It is not too different from something like a car or even a television set in a lot of respects (just a heck of a lot more expensive), and I attach zero emotional value to the place where I hang my hat.

    Personally, I would rather have say $300K cash in the bank and be paying rent than have $0 bank but own a house. (Or even say $400K/$100K) To me that amount of cash would represent maybe a couple of decades of traveling around the world and being truly free of worldly possessions, not chained around the neck by house I owned and having to mow the lawn (or pay someone to do it).

    If I ever do own a house, I could not imagine it ever being more than say 10% of my net worth. If I ever reach a million dollars, maybe I’ll buy a little condo somewhere ..

    I could also never see going even one penny in debt to own a house.

  21. @Bachelor: If you put in enough edible landscaping, there is very little lawn to mow. 5 minutes with my weedeater and I’m done :) And I enjoy the garden and edible landscaping.

    I’ll agree that a house is a house, a thing…. but a home is something entirely different – It does become emotional – something one is happy coming home to, a restful place, a place where one enjoys living. A Place of memories, and memories in the making – which become emotional.

    I did not go into debt to own mine – I paid cash. It’s less than 20% of my net worth, and I’m fine with that.

    It is good to know oneself tho – and if you have a wanderlust, a house is not for you. But me, I’m a real homebody – and this is my dream :) Constant travel would stress me out :) I’ve done enough of it already. I wonder if you will change your mind when you are older? Enjoy your dream tho of traveling etc, and I’ll enjoy my garden :) To each his/her own.

  22. “real estate prices do typically increase over the long term”

    over the long term, residential real estate only keeps up with the rate of inflation – think of it as an inflation hedge only

    property taxes tend to increase significantly faster than the rate of inflation

    over the last 20 years, the large home where I grew up doubled in value, but property tax increased nearly 4x

  23. Frugal Dad, the following article was published in the WSJ in March of 07. I think it should be required reading for all contemplating buying a home. Why your home isn’t the investment you think it is.
    C:Documents and SettingsHP_OwnerMy DocumentsWhy Your Home Isn’t the Investment You Think It Is – WSJ_com.mht

  24. Hi Frugal Dad! I read your posts often, but I think this is the first time I’ve commented. I just thought I would say, that the excuse “why throw your money away renting when you could have a mortgage” is actually sort of true in our Houston market, which is still holding pretty strong. The cost of renting a $120K home in our area is about $1200/ month. Even a lot of the apartments in our area rent for $1K /month.

    For those of your readers that live in similar markets, or are trying to use the same excuse…rent a crappy apartment like we do at half the price until you get your debts paid off and are in a better position.

    Do we like living in our little piece of suburban ‘ghetto’ heaven? Not really, but as you said, a home is created with love, not bricks and sticks.

  25. Thanks for another great post. We don’t plan to upgrade to a home until we have saved up 20% down and can finance a 15-year fixed-rate mortgage that we can pay off early :-)

    My husband is a lender (for cars, not houses) and is frequently saddened by how many dealers are so desperate to get people into vehicles that they try to get the same “creative financing – long term/high rate” for their customers. I think the same principle applies … the need for things we can’t afford is like an epidemic.

  26. I still feel there is something mystical about owning a home. My wife and I are looking and, while I’m a very rational person that crunches the numbers on just about everything we buy, a house is one of those things that you still want to do even if the numbers aren’t overwhelmingly positive. I realize it’s a hassle with the taxes and the emergencies, but still—it’s “our hassle.” We own it. Does this make sense? Financial sense? Maybe not, but it still counts for a lot.

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