For most people the biggest financial decision they will ever make is whether or not they should buy a house. At one time buying a home was considered to be a part of the American Dream. You know the one with Ward and June Cleaver. The white picket fence, two kids, two cars, etc, etc. This financial tip is part of a larger discussion I hopefully will start with people about why don’t more people buy homes and those that do what can you do to buy a house. So the first fundamental question is why don’t more people own homes?
However, the 2008 financial crisis seemed to kill that American Dream for a lot of people. While home ownership has been on a bit of an increase over the past few years. Home ownership is still well-below its record highs that were set back in the mid-2000s. Also, there is still a significant portion of homes, about 10% of homes in America that are underwater, meaning that the value of the home is less than the mortgage.
There are several factors, which might explain why home ownership hasn’t risen in various parts of the country.
1) There are parts of the country where homes are really expensive. In Silicon Valley, the Northeast, and other parts of the West Coast it is extremely expensive to own a home. The most expensive housing markets are in places like San Francisco, New York, Boston, and other areas. Even with two people working it is really hard to buy a house. It is just too expensive so a lot of “normal” people are squeezed out of the market.
2) Wages in the United States have not kept up with owning a home. A good rule of thumb that I followed when we were looking to buy a house was that it shouldn’t be more than 2.5 to 3 times your income. I was lucky to find a house that was within two times my income and we could have bought more house, but I am certainly glad we didn’t. THe average median income in the United States is just over $51000. The average median home price is just over $200,000. So the rule of thumb for most people is already blown out of the water. Unfortunately, owning a home becomes prohibitive for many people. People shouldn’t buy a house to buy a house. They should buy a house because it is something they want to grow into and/or need.
3) I think people’s expectations are a bit out of whack. Today, the average home is over 2300 square feet. That home is almost double what it was just 20 years ago. Do we actually need all that space? I think that Americans have HGTV fever. They see all of these shows with granite countertops, modern finishes, brand new homes and think that there home should look like that instantly. When, in reality, that stuff should happen over time for people. I mean you can’t make everything new right away. And I think when people look for homes, if it doesn’t look like that on TV or if isn’t big enough we won’t buy it. I have had two homes in my life. One with my ex-wife that was over 2300 square feet. We barely used the space, but it was a nice newer home. The home we own now is just over 1300 square feet and I don’t feel cramped at all. I do wish we had better closet space, but in general I have come to realize we don’t need that much space. I am happy with our below average home. That and I can pay it off quicker.
4) Many people don’t want to buy a house. The old formula for buying a house was that once you had a job, perhaps a family and the like you would move to the suburbs, buy a house, raise your kids, etc. However, more and more people are moving back to cities. Many people, particularly young college graduates and professionals are eschewing the suburbs for a more urban environment. They like the amenities of having restaurants, bars, coffee shops, and their jobs within close proximity. More and more young people are giving up their cars or delaying having families. I am not saying that this will get rid of home ownership completely, but I do think we have to rethink what buying a “home” means. For some that might mean a much smaller apartment, townhome, condo, whatever, but that fits into a much more urban environment.
5) Lending standards have grown much tighter these past years. After the financial crisis hit in 2008 many lenders became really gun shy about lending to people. Even with a great credit score, a job, and a down payment it was really hard for some people to qualify for a loan. Banks, rightfully so, scrutinized applicants much more and many qualified applicants turned away. Prior to the financial crisis anyone with a pulse could get a mortgage. After the financial crisis it swung the other way and you basically had to have all your ducks in a row to even qualify.
6) Saving a large down payment is hard to do. With the advent of the financial crisis and lending standards become much more stringent home buyers had to come up with more money down in order to buy a home. Ideally, people recommend that you have a 20% for a down payment for your home. However, how many people can really save $40,000 in a very short-term, plus closing costs. I mean most people don’t even save so getting people to save that much cash can be a bit of a burden for some. Luckily, more and more lenders are relaxing the down payment aspect of buying a home. There are some loans where you can buy a home for as little as 3% down or 5% down. Saving $6000 or $10000 is certainly easier than $40000. Don’t get me wrong it is still hard and you have to be disciplined, but that is the way it should be. Home ownership isn’t a right, but a privilege. It requires some investment so you should have to save a little bit to buy a home. Mrs. ROB and I only put 5% down on our home, but the price was much lower so we were able to also get a much lower interest-rate and decided to do a 15 year mortgage instead of a 30 year.
I am sure there are other factors that have contributed to the slow growth of home ownership, but these are the primary factors that exist today. In one of our next financial tips, we will talk about whether or not home ownership is right for you? Owning a home is a great thing and I wouldn’t turn my back on it, but it isn’t right for everyone.
What do you think? Why aren’t more people buying homes?