Buy or rent? The new view of the American Dream
Shannon Lee | Improvement Center Columnist | December 14, 2015
Once upon a time, the American Dream was to own your own home, complete with the proverbial white picket fence. But over the past few decades, that dream has been shifting to something less permanent.
A report by Jones Lang LaSalle, a financial and professional services firm specializing in real estate, found that the overall rate of homeownership declined to just over 63 percent during the second quarter of 2015. Those in Generation X -- who are now between the ages of 35 and 55 -- have seen homeownership drop to 58 percent.
In the meantime, rentals have become all the rage, with a low 6.8% vacancy rate. The increase in those renting has risen by 4.9 percent from 2014 to 2015; since 2000, it has risen a whopping 27.9%.
In other words, the new American Dream is beginning to look a lot like a rental house.
Why is homeownership declining?
Today's homeownership rate is the lowest it has been since 1967, despite the fact that interest rates are quite enticing. Employment has begun to rise after the Great Recession, and those whose credit scores suffered a blow after bankruptcy or foreclosure are getting on their feet again. But why the trend away from owning a home?
According to the JLL survey, even as homeownership has declined, prices for homes have been steadily increasing. A low interest rate only goes so far when prices are nudging out of range for many buyers. Those in the market for a new home look at the prices, calculate the traditional 20% down payment, cringe, and decide to rent for another year. But many don't understand that they might not have to wait.
David Hosterman, branch manager of Castle & Cooke Mortgage in Greenwood Village, CO, believes there are many misconceptions about down payments. "I think many consumers are confused about the home buying process and that is causing less people to try to take advantage of homeownership," Hosterman said. "Many consumers feel like they need to have a substantial down payment and this is not correct. There are many national, state, and county grant programs that allow consumers to utilize grants for down payment assistance should a consumer not have 3.5% or 3% for a down for a standard conventional or FHA loan."
Even if a potential buyer decides to go for it, the length of the process can mean signing another rental lease, even if they don't want to. "Many times consumers have a short time to buy with their lease coming up and they have trouble finding the right house so they just continue to rent and re-sign another lease," Hosterman pointed out.
Once they re-sign, they might face steep fees if they want to move out before the term is up. "In many cases apartment complexes make it difficult for consumers to get out of their leases should they want to buy. I strongly encourage consumers to talk to the leasing agent about what happens should they decide to buy so they are prepared when the time comes."
In addition, renters are also acutely aware of the fact that maintenance is built into the rental price and often requires little to no work on the renter's part. The costs of maintaining a home on top of a mortgage can be quite daunting to those who are unaccustomed to handling upkeep on their own. Looking at maintenance or replacement costs for things like septic tanks, landscaping, drainage systems, and more can be an eye-opening experience that makes some prefer renting.
Is buying a home still a good idea?
Even with all of these challenges to getting renters into homes, Hosterman believes things are looking up. "In my opinion we are seeing more and more people in the 30-40 age bracket buying homes. It seems like many people are not just buying single family homes but also buying condos, town homes, row homes, etc. to call home."
Ultimately, buying a home still makes more sense for most people. Owning your own home offers the ability to upgrade or remodel as you see fit, a potentially large tax deduction, equity that grows with each payment, a boost to your credit score, and for those with a fixed rage mortgage, the certainty that payments will not go up.
Just remember the 'seven-year rule' -- if you will be living in an area for seven years or more, buying a home makes sense. If you will be selling that home before seven years is up, it makes better sense to rent.
"I still think the American Dream is to own a home," Hosterman said. "I think many consumers understand the importance of homeownership and the long term benefits associated with it. In my opinion it makes sense to buy sooner than later. Buying a home is a big investment but can pay dividends in the long term."