Taylor Reynolds, BridgeTower Media Newswires
The American Dream is the opportunity for individuals to prosper and succeed through hard work. Many consider home ownership to be a critical aspect of the American Dream.
Home ownership is important for many reasons. Homes tend to create safer neighborhoods and stabilize communities. Schools are built around strong communities which encourage and provide education to the next generation. From a base economic level, when people buy homes, they also start to spend money, which helps grow the economy. The homeowner may buy refrigerators, sofas, tables, lawn mowers, paint, etc. and may also engage multiple services and/or contractors for repairs and construction projects.
In fact, according to statistics from the U.S. Bureau of Economic Statistics, housing contributes close to 20 percent to gross domestic product in the U.S. The current home ownership rate in the U.S. is about 63 percent - a level not seen since 1965. If home ownership rates increase, it could lead to growth in the U.S. economy and create wealth for homeowners through equity.
Home equity is the current market value of the house minus the debt you owe. For example, if the current market value of your home is $200,000 and you still owe the bank $160,000 in mortgage payments, your home equity is $40,000 ($200,000 - $160,000). For many, home equity is a large portion of their family's net worth. Compared to renting, where each month a landlord receives your payment and no equity is accumulated, renters do not increase their personal net worth.
One reason contributing to today's low ownership level is that previous generations like the baby boomers and Generation X were less likely to be burdened with as much student debt as millennials are today. They also were more likely to have a GI bill they could use for a down payment on a home. This enabled previous generations to benefit from home equity which to some is their largest asset. Previous generations also married at earlier ages, which has a high correlation with homeownership. These factors have tended to contribute to higher past home ownership rates in the U.S.
Today though, millennials are burdened heavily with student debt. The best investment one can make is in him or herself, but excessive debt detracts them from becoming homeowners. Instead, they choose to rent or live with family members. They do not have enough cash saved to make a down payment on a house. Also, housing prices are at historic highs and many low to middle class individuals have essentially become priced out of today's housing market. Income inequality prevents people from being able to purchase a home. Collectively, these factors have led to a low rate of home ownership in the U.S.
Current trends could prove problematic down the road, as home ownership creates wealth for families, allows for upward mobility, and provides many important positive economic tailwinds. However, as the housing crisis taught us, lending standards must be maintained and home owners need to be educated about the economic costs and benefits of owning their own home.
To be sure, the American Dream is alive and well. However, with millennials comprising the largest demographic in the U.S. and not yet having embraced home ownership, only time will tell if housing will play as large a role as it did in years past.
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Taylor Reynolds is an Equity Analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees.
Published: Mon, Nov 27, 2017
