What is it about owning a home?
Oh, right – the American Dream.
President Obama has announced another executive maneuver meant to make it easier for first-time buyers and those on the cusp of qualifying for a mortgage to become home owners. The Federal Housing Administration will reduce the annual cost of mortgage insurance for people receiving subsidized FHA loans from 1.35% of the borrowed amount to 0.85%. That cut should save the typical borrower about $900 per year, according to the White House.
The FHA move comes on top of other measures meant to make home ownership easier for middle- and low-income borrowers, such as recent moves by Fannie Mae and Freddie Mac to allow lower down payments for some borrowers and to ease standards for lenders, which ought to make mortgages easier to get.
The housing recovery has been a notable weak spot in an otherwise improving economy, with home values still about 10% below peak values from 2006. Tough lending standards, meanwhile, have kept many potential buyers on the sidelines. The cut in FHA insurance costs, Obama said at a speech in Arizona, “should help further accelerate growth in the housing market and stabilize prices.”
There’s a big problem, however: Owning a home these days may be a much bigger impediment to career success than it ever was in the past. Yet politicians and their allies in the real-estate business are still preaching the old gospel about home ownership, as if it’s the same path to prosperity it always was. It isn’t, and anybody considering buying a home needs to think doubly hard about the liabilities that come with such a big commitment, as well as the benefits.
Home ownership is obviously a big commitment of money, but it’s also a commitment of time: Out-of-pocket transaction costs that typically run in the thousands essentially lock you in place for at least five years, unless you’re willing to take a sizeable loss in the event you have to sell sooner than expected. In the past, that wasn’t necessarily a problem. Widespread prosperity meant there were many opportunities in most places, so you could move from job to job or even career to career while living in the same house. And modest but healthy appreciation of real-estate values made home ownership a solid investment over time.
The tenets of the past don’t necessarily apply any more, even if politicians are still reading from the old, outdated playbook that pays homage to the American Dream — owning your own home — no matter what. Economic growth is much patchier now and tends to be concentrated in regions driven by technology or energy, as the Milken Institute’s latest list of top-performing cities reveals. Many areas of the nation are stagnant and likely to remain that way. The remaking of the U.S. economy makes mobility a prerequisite for career success. More than any time during the last 60 years, people need to be able to go where the jobs and opportunities are, because opportunity is less and less likely to come looking for you.
Besides, the home ownership rate isn’t exactly heading for historic lows, as this chart generated by the St. Louis Federal Reserve Bank shows:
Throughout the 1980s and early 1990s, the U.S. home ownership rate was fairly steady at around 64% of all households. It began to rise in the late 1990s and peaked at 69% in 2004, which we now know was near the peak of a catastrophic housing bubble. The home ownership rate has since drifted back to about 64%, according to the latest data from the Census Bureau. So we’re basically at home ownership levels you might call perfectly normal.
A high level of home ownership doesn’t necessarily correlate with national wealth, either. The home ownership rate is a mere 53% in Germany and just 44% in Switzerland, two very wealthy countries. It’s 84% in Russia, which has a backsliding, kleptocratic economy. Owning a home is one way to generate wealth—as long as your expenses aren’t too high and the housing market is going in the right direction—but there are many others, including some that are safer, such as investing conservatively in financial assets and allowing profits to compound over time.
Renting won’t automatically make you successful, of course, and tenants face challenges, too—especially rents that are rising faster than inflation, as the renter population swells and builders struggle to keep up with demand. But if policymakers were to focus on the singular goal of helping all Americans become as prosperous as possible—instead of getting sidetracked by the misleading allure of home ownership—they might focus more on new ways to make rents affordable, especially in hot job markets. Obama, after all, doesn’t own his own residence—and may find it necessary to move around himself within the next couple of years.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.