My answer to the question posed in the title is ‘I have no idea’. However, I’m a firm believer that homeownership is not the best path for everyone and that the role of homeownership in the U.S. has been skewed in a way that is dangerous.
The term ‘American Dream’ comes from James Truslow Adams ‘Epic of America’ who wrote in 1931, “life should be better and richer and fuller for everyone, with the opportunity for each according to ability or achievement regardless of social class or circumstances of birth.” The original term didn’t have anything to do with real estate but has evolved over the years to center around owning your own home.
For decades policy has focused on making it easier and more attractive to own a home with the goal of increasing the homeownership rate. However, following the financial crisis, economists and policymakers have been re-evaluating the role of homeownership in the American Dream. Many question whether the American Dream should include homeownership or instead focus more on other aspects of upward mobility, and many acknowledge that homeownership is not for everyone.
From a financial perspective, it’s incredibly difficult to measure the returns on housing, but it’s important to recognize that housing in the U.S. is highly-subsidized. Interest rates are held artificially low, the gov’t backs mortgages, programs allow for small down payments, property taxes are held below values, and tax policy allow homeowners to deduct mortgage interest, property taxes, and some financing costs.
At the same time, public policy and economic theory have failed to address rising housing affordability crisis, rising household debt, financial instability, and growing economic inequality. These are major problems which are difficult to address. It’s almost impossible to make homeownership more affordable while also allowing homeowners to maintain the value tied up in their residences.
Owning your own home can be empowering, by providing physical and economic security including collateral and leverage credit. However, over the past few decades, the role of the home as a financial asset has overtaken its role of shelter. The fact that most of the population’s wealth is tied up in their home rather than financial assets, makes it difficult to address the rising inequality driven by homeownership.
While I can’t begin to imagine a solution to the complex set of political and economic issues, a good place to start is to share some of the innovative housing models and talk about the value of renting.
Innovative Homeownership Models
There are several innovative home finance programs making it easier for individuals to purchase and benefit from the value of their homes.
Landed helps professionals (beginning with educators) with down payments for homes in expensive areas starting with San Francisco, Seattle, San Diego, and LA. Salaries have not kept up with the cost of living and teachers working in expensive metros can’t afford to live in the areas they’re so vital to. Landed offers to pay ½ the down payment in return for a portion of the potential appreciation. Most professionals can’t afford the typical 20% down payment and over 25% of all mortgage borrowers who used FHA-insured loans last year received assistance from a relative to make the down payment. Unfortunately, that’s not an option for everyone. Landed hopes to step in and fill that void.
Point is a home finance program which invests in home equity, paying you cash in return for a portion of your equity in your home. Similar to Landed, Point shares in the upside if the home appreciates. However, if the home depreciates (an outcome unfathomable to most homeowners) Point gets paid back after the bank, but before the homeowner. Point shares some downside risk, but not as much as the homeowner who is in the first loss position.
Another option for would-be homeowners is a rent-to-own program, where renters pay an option (typically 3%-5%) to purchase a home at some pre-determined price at some agreed-upon time in the future. The renter pays a small monthly premium to the market rent which accrues and is applied to the purchase price in the future. If they go forward with the purchase, the deposit and monthly premium is applied to the home purchase.
These models enable potential homeowners to more easily access homes and tap the equity value in their homes, but also limit the potential upside in appreciation while doing little to minimize the downside risk.
The Value of Renting
Renting has long been viewed as ‘throwing away money’ each month because you’re not building equity value in a home. As someone who’s been a lifelong renter, but will purchase a home in the future, I know first-hand the benefits of renting. There’s the obvious; flexibility, minimal maintenance, and property amenities, but there’s the less commonly noted sense of community and limited financial risk.
From a financial perspective, renters are only responsible for the monthly payments through the end of their lease term. There’s no down payment and they don’t need to take on massive personal debt. While the monthly rent payments don’t go toward building equity in an asset, the capital saved can be invested in opportunities yielding historical returns above that of your personal residence.
On the community side, apartment operators have become focused on the resident experience. Weekly events and community-driven amenities such as day care and resident gardens are becoming more common. Many buildings have bikes, kayaks, and stand-up paddleboards complimentary to the residents. Apps such as TF Living and Lively have further enhanced the resident experience with a focus on fitness, pet and community bonding activities. Living in an apartment community is fun.
On the flipside, leases are typically 12-months long, so renters are exposed to annual rent growth, which could force them to move. If you’re a family with school-aged children, this could be very disruptive and frustrating. While I haven’t seen anything, I hope programs emerge to retain long-term renters and help renters save to buy a home one day.
New Renting Models
As rents have increased, we’ve seen the introduction of innovative apartment models including micro-units, co-living, macro-living, and Airbnb-friendly apartments. These models create more affordable housing while also improving the sense of community and curating the design to the specific needs of residents. Co-living is a particularly interesting model that stems back to the residence hotels of the early 20th century. It’s the way many used to live with a shared common area and private bedrooms. Residents only pay for the space they need. With new renting models, the cost has come down and the community experience has improved, all without the huge financial risk. For individuals who can’t afford to buy, are looking for flexibility, don’t want to buy just yet, or prefer the ease of renting, these new models are extremely attractive.
How we Think about Homeownership
The ‘American Dream’ has been misconstrued to include owning your own home. It’s been supported by the narrative that homeownership is a great investment. It’s the single largest purchase most people will make in their lifetime, which is subsequently highly levered and thus risky. It’s not uncommon for individuals to have 300% of their net worth concentrated in their home (the exact opposite of diversification).
While there are many benefits to homeownership, I think the narrative that it’s a great investment and everyone should strive to own their own home is wrong and dangerous. Many of my peers view homeownership first as an investment before a ‘home’ to be enjoyed, to create lasting memories, and to make their own.
Instead, I think we need to recognize homeownership is not the right path for everyone, even if they can afford it and renting is a great alternative to homeownership with many benefits.
What do you think?