Is declining homeownership a sign that the American Dream is dead or just being deferred?

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According to the Commerce Department’s latest statistics, homeownership levels at the end of the second quarter in 2014 stood at 64.7 percent, the lowest level in 19 years.

It gets worse.

For people under 35, the homeownership rate has tumbled from 39 percent in the second quarter of 2010 to 35.9 percent in the same period in 2014.

Meanwhile, current home sales are hovering around 5 million a year, about a half-million short of the 5.5 million sales that the real estate market needs annually to stay healthy. New home sales are topping out at about 400,000 a year, a far cry from the record high 1.4 million units sold in 2005.

Richard K. Green, director of the USC Lusk Center for Real Estate in Los Angeles, Calif., has a short and simple answer on why homeownership — long considered the cornerstone of the American Dream — is declining.

“The Gen X and the millennial generations are delaying marriage,” Green said. “While home ownership among married people is about 80 percent, it’s only about 50 percent among singles. Single people don’t want to be tied down with a mortgage that amortizes over 30 years.”

Indeed, the average age of marriage for both men and women is rising, currently standing at 29 for men and 27 for women. The average age for a woman to give birth is also on the rise, currently at 25. Consequently, with fewer household unions taking place, there is less need or upward pressure to buy houses.

If millennials aren’t living in their own homes, they’re either staying longer with mom and dad (or with mom or with dad), or they’re renting. But with rents climbing ever higher, millennials again are feeling the financial squeeze and seeing their homeownership dream perpetually deferred.

“Rents are becoming so high, especially in places like Los Angeles, that the opportunity to save for a down payment is almost impossible,” Green said.

Some good news

On the brighter side, U.S. payrolls have expanded by more than 200,000 jobs for six straight months, a feat the economy hasn’t pulled off since 1997. The trouble is, many of the newly added jobs comprise the lower end of the wage spectrum, low-wage work at places like strip malls and fast-food restaurants, according to Michael Evangelist, author of a new National Law Project report.

“Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal,” Evangelist said.

Lower-end or stagnant salaries are not phenomenal for purchasing homes, however.

Further keeping a lid on home purchases is soaring student debt. While stories about art history majors with $200,000 in student debt aren’t the norm, the statistics are nonetheless staggering, with student loan debt now topping $1 trillion. In 2013 alone, student loan balances increased by $114 billion.

In a study issued this week (Aug. 11-15), Goldman Sachs Bank USA economists Eli Hackle and Hui Shan showed that the homeownership rate of young adults, ages 25-34, who were carrying more than $50,000 in student, was 8 percentage points lower than for college graduates with less than $50,000 in student debt.

A new perspective on an old dream

Although Ryan Harrison, a middle manager for a movie studio, has largely paid down his student debt and draws a low six-figure salary, he remains a confirmed renter in Los Angeles’s west side. The sting of the Great Recession is still too raw, his recall of his parents’ house in suburbia being halved in value still a little too fresh. For him, the American Dream sounds more like the American “Ream.” For him, renting gets a bad rap. He’s newly married, too, but neither he nor his wife envisions suburban picket fences in their immediate future.

“In prime metropolitan areas, you can rent the same condo/house for hundreds, if not thousands, of dollars less than the equivalent outlay, considering all factors, were you to purchase the same residence with a 20 percent down payment, even at today’s low rates,” Harrison said.

“Take a prime area like Brentwood or Santa Monica, it’s the same story,” Harrison added. “That two-bedroom, two-bath, 1,000-square-foot, 1980s condo, purchased for $600,000 with 20 percent down and a 4.25 percent interest rate, plus property taxes and $350 to $400 in HOAs, will run about $3,300 a month — and that is not even assuming any maintenance costs. (Using our calculator, see how much house or condo you would qualify for.)

“Why would I want to lock myself into that and lose my flexibility, when I can rent the same place for $2,500 to $2,800 without too much searching? I’m worried less about losing my job than being stuck in some overpriced home where I can’t pack up and leave to go to that next opportunity, if I need to.

“Yes, I would lose in the long run if I planned to live there 30 years,” Harrison continued. “But even if I lived there five years, then sold or rented it out, there would be no guarantee of appreciation. Plus, the costs to sell, including the agent’s 6 percent commission, could wipe out any small gains.”

Not even a bargain-priced property in the suburbs is likely to make a homeowner out of millennials like Harrison.

“Why buy a house inland or in one of the ancillary areas and commute?” Harrison further pointed out. “Unless someone has kids, I don’t know anybody in my age bracket, 25-32, who made that decision. Many of these people have solid six-figure incomes and the means to buy a prime-area condo or starter home in Torrance, Encino or Burbank, but none of them have. They all would rather live in a prime location or within a 15-minute commute of work and spend their extra cash on fun activities and restaurants while they’re still ‘young,’ rather than have that big backyard out in Rancho [Cucamonga] or Simi Valley.”

Nor will the promise of continued low interest rates make a buyer out of our resolute renter.

“I actually can’t wait until rates go up to between five and six percent,” said Harrison. “That will return the price of houses to more normal levels. That $600,000 condo at five to six percent turns into a $500,000 condo real quick, because I doubt someone will want to pay $4,000 a month if rates go up.”

West Los Angeles, fueled by Pacific trade and the entertainment industry, is far removed from Omaha, Neb., where the median price for sold homes is $163,500. The twin locomotives driving the economy there are Union Pacific and ConAgra, both headquartered in Omaha.

In her city, Brenda Sedivy, a real estate agent with Berkshire Hathaway Home Services, said there are lots of young adults clamoring to buy their first houses. They have found employment, cleaned up their credit, whittled down their student debt, saved for a down payment and are clearly in the market for a home.

Unlike Harrison, they still see advantages of owning a home. They face another problem, however.

“There just aren’t enough houses for sale in our market,” Sedivy said.

So, in one area of the country, owning a home is no longer viewed as the golden passport to the American Dream. In another part of the country, it’s a dream deferred because of inventory shortages.

As a result, homeownership levels continue to decline.

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  • Peter Bennett

    I like this piece because it really lays out the reasons as to why homeownership is falling. Too often we hear lenders and real estate agents telling us that rates have never been lower, you gotta buy now. Not so fast! There are a lot more options to weigh before taking that kind of plunge. Home prices on the West Coast are already in a bubble due to all the Pacific Rim money pouring in. Inflated money here is better than confiscated money so the investments continue and the bubble expands.

  • Phil Crocket

    The WSJ states that the rate fell to 65.4% at the end of March – which was the same in 1997.

  • Peter Bennett

    Most recent figures reported by the Census Bureau show homeownership level at 64.7%. Regardless, will be interesting to see if lower trend continues next month.