Forget About the American Dream

In a 2004 speech to the National Association of Home Builders, President George W. Bush perfectly described the attitude of the day: "For millions of our citizens, the American Dream starts with owning a home."

He went on:

Home ownership gives people a sense of pride and independence and confidence for the future. When you work hard, like you've done, and there are good policies coming out of our nation's capital we're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.

And boom went the dynamite. The rest was history.

With the housing bust and millions of foreclosures over the last five years, a predictable trend is taking place: The homeownership rate is plunging.

Homeownership hit 65.4% last month -- the lowest rate in 15 years, according to the Census Bureau. The rate peaked in 2004 at 69%. The average since the bureau started keeping track in the early 1960s is 64.1%. So, we're getting pretty close to normal now.

What's it mean, and why should you care?

Every home is owned by someone, be it the person living there, a landlord, or a bank. Changes in the homeownership rate occur when the balance between those three shift.

During the boom years, a higher portion of families actually owned the roof over their heads. Today, more of those roofs are owned by investors, apartment companies, and banks. According to the National Association of Realtors, investors' share of home sales surged to 64.5% last year to the highest level in seven years. For every 100 homebuyers who intended to live in their homes, 44 bought purely for investment. Half of those investors paid all cash. Their incentive to do so is clear. "During the past year investors have been swooping into the market to take advantage of bargain home prices," NAR's chief economist Lawrence Yun said last month. "Rising rental income easily beat cash sitting in banks as an added inducement." Millions of Americans were foreclosed on, in other words, and deep-pocketed investors are feverishly buying up their homes.

What are the old homeowners doing now? Two big trends tell their story.

One, household formation fell like a rock during the recession as young adults moved in with their parents and existing families "doubled up" in a single home. These aren't small numbers, either. "In 1980, 11 percent of 25-to-34-year-olds were living in multigenerational households. By 2008, 20 percent were," reports The New York Times. Household formation fell to just 398,000 in 2009, the lowest in decades and about one-third the trend rate. Rather than opening up their door where they live and saying, "Welcome to my house" as Bush praised years before, they moved into their parents' basement.

Two, renting has become the new cool thing to do. According to the Census Bureau, the nationwide rental vacancy rate is now the lowest it's been in over a decade as former homeowners trade their mortgages for leases. Nationwide apartment rental prices rose 4.4% last year, according to TransUnion -- above the rate of broader inflation. At this rate, HGTV is going to start a show called "Rent Hunters."

Stories are common across the country of potential homebuyers struggling to close deals as they compete with investors buying homes in bulk and renting them out. Given potential returns, you can hardly blame them. In February, Warren Buffett told CNBC, "If I had a way of buying a couple hundred thousand single-family homes ... I would load up on them ... it's a very attractive asset class now."

In fact, in 98 of the 100 largest American cities, it's now cheaper to buy than it is to rent. With millions of Americans either shut out of the mortgage market due to bad credit or disenchanted about homeownership after the crash, home investors who want to become landlords are in the best position they've been in in years. It's the return of that value -- along with a rebound in household formation -- that will drive home construction higher, setting homebuilders like D.R. Horton (NYSE: DHI  ) , Meritage (NYSE: MTH  ) , and MDC (NYSE: MDC  ) up for a much better coming five years than the previous five.

So is the American Dream dead? I think you have to redefine what it is in the first place. Is it owning a home you could never afford and going through foreclosure? No. It never was. The American Dream is being in a strong enough financial position that you and your family have a decent quality of life and a certain amount of security. Millions of Americans are closer to that goal as renters than they ever were as homeowners.

For more on how the recession is impacting the housing market, check out my e-book 50 Years in the Making: The Great Recession and Its Aftermath for your iPad, Kindle, or Nook on Amazon or Barnes & Noble. It's short, packed with information, and costs less than a buck.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (26) | Recommend This Article (41)

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  • Report this Comment On May 04, 2012, at 2:44 PM, WikiCPA wrote:

    Rent hunters is definitely going on right now. Every bank auction on foreclosed homes in Southern California (especially near universities) are packed with these hunters. I can't get anything without getting getting outbidded! And you can bet it is all in cash.

  • Report this Comment On May 04, 2012, at 2:58 PM, rossirina wrote:

    I insist to keep dreaming. Dave Bach convinced me that people that own homes are 40 times wealthier than those that rent. I also found the Cambridge Methodology that says that young people should use a conservative asset allocation (unlike the standard approach that young people can have a more risky portfolio) to save enough for home down payment. You can find other tips and tricks at this website: www.planandact.com

  • Report this Comment On May 04, 2012, at 3:02 PM, TMFMorgan wrote:

    <<Dave Bach convinced me that people that own homes are 40 times wealthier than those that rent.>>

    But did they become wealthy because they own homes? Or is owning a home something that wealthier people do? Confusing correlation and causation can be dangerous.

    -Morgan

  • Report this Comment On May 04, 2012, at 6:39 PM, xetn wrote:

    "During the boom years, a higher portion of families actually owned the roof over their heads."

    In fact, they only owned the right to use the property, the bulk of ownership was shared with the mortgage holder, and the government taxing agencies.

  • Report this Comment On May 04, 2012, at 7:11 PM, 1wayout wrote:

    I agree with xetn.

    99.9999...% of the people in this country fail to realize that property ownership is a mirage. Every square inch of land in this country belongs to the government, and the 'homeowner' pays a yearly tax to the government for the privilege of leasing that plot of land. Fail to pay the tax, and the government takes 'your' land away from you and leases it to someone else. It doesn't matter if it is a house, an apartment complex, a tower complex, a mall... It all belongs to the government, and you'll lose your right to ‘own' the land if you ever skip paying the tax.

  • Report this Comment On May 04, 2012, at 7:53 PM, hbofbyu wrote:

    1wayout,

    Any land on this earth is yours for the taking. It has always been that way.

    All you need is enough guns and resources to keep someone else from taking it from you once you have claimed it. I suppose you could say that's why you pay the government to help you protect it.

  • Report this Comment On May 04, 2012, at 10:46 PM, luckyagain wrote:

    In order to be able to afford retirement, the following is necessary:

    1.Own your home, it will almost always be cheaper than renting. Rich people own property; poor people rent.

    2. Have a pension which is becoming really hard to do now a days because so many companies want to you to have just a 401k.

    3. Have social security which the Republicans want to convert into a glorified 401K. If social security had been invested in the stock market in 2008, everyone on social security would have had their benefits cut by 40%. Investing has risk along with rewards. Anyone who has invested for a long period of time realizes it.

    4. Have medicare which the Republicans want to convert into a voucher system. Just call a medical insurance company and ask for a rate quote without medicare if you are 80 years old. Can you imagine trying to negotiate with a medical insurance company when you are 80 or 90 years old? Good luck.

    Buying a home in 2007 or 2008 has seen a huge decrease in value but if you are going to live in the place for 30 years, it will eventually turn out to be a good long turn investment. Now is a good time to buy a house if you have a job, a good credit and a long term horizon. Over 30 years ago, my father-in-law told me before I bought my first home that it always seemed that buying a house was a lousy investment but in the long term, it would be good. He was right.

  • Report this Comment On May 05, 2012, at 12:18 AM, gcp3rd wrote:

    Some interesting points, even if cynical. But 1wayout, do you suggest we collect taxes based on a system of voluntary participation? It would of course never work. What we have is the ability to play by a few very loose rules. We have some socialism to take advantage of the efficiencies that brings - interstate roads, public education, social security/medicare. Beyond that you can go be a millionaire if you actually want to and put some effort in. That's a pretty amazing opportunity because of how hands off the gub'ment actually is.

    As a real estate broker and a student of financial literacy I can tell you that owning the home you live in is a liability. But guess what? So is renting the home you live in. You are LIABLE for the housing payments in both cases. Some will argue owning ties you down and/or renting is flexible because you could move in with family in case of "an emergency" - really? All you risk in a mortgage is bad credit, and that doesn't last forever if it does happen.

    So, have we learned nothing from Warren Buffett? Wealth is built over DECADES, not weeks, months or a few short years. You will live for decades. If you pay off a 30 year mortgage in 30 years you own a piece of property with equity in the hundreds of thousands. Even better you remove a huge chunk of the cost of home ownership when you may not have as much income. If you pay a rent payment for 30 years you will have contributed to the wealth of another person on the order of hundreds of thousands. That's the point. And it's something that most of us are able to participate in if we want. But you can do anything with or without responsibility.

  • Report this Comment On May 05, 2012, at 1:45 AM, lowmaple wrote:

    gpc If you are able to rent and cannot afford a home, or even if you can you may be able to invest and then buy that home. Depends on one's circumstances..

  • Report this Comment On May 05, 2012, at 11:40 AM, Darwood11 wrote:

    I agree with some of the commenters. Home "ownership" numbers were a ruse. Purchase a zero down home and the bank owns it. The idea was simple; use someone else's money to get wealthy. As a friend back in 2003 told me "I make more on the appreciation of my home each year than I do from working." That was a dangerous perspective.

    When the bubble popped, these "owners" realize the truth, and that was "we are serfs." "The bank owns the property, I pay the taxes and I maintain the land."

    It was a dangerous game. So too was borrowing lots of money to get dubious college degrees. By "dubious" I mean getting a degree in something that might not pay the bills for 40 years. Or perhaps I should use the word "delusional?"

    We now have millions attempting to "game the system" and walk away from home loans and school loans. Some people imply that's okay; there are no consequences. I find that to be amazing. We do live in a closed system. If the government bails out debt, loans and so on, that contributes to deficits and diverts funds.

    As for where one lives, that's a personal choice. Renting is fine if you can find a good landlord and a well maintained property. A few years ago, I had a rental and the owner didn't bother to have the parking lot plowed on a regular basis. So some days, it was impossible to drive to the street. My spouse and I moved and got a condo. We're happy with that choice.

    My perspective was and remains "what's the better investment in capital over 20 years? Ownership or renting?" I suggest that people do the numbers. I prefer the New York Times "Mortgage versus Rent" calculator, which is fairly sophisticated if one uses the "advanced settings."

    However, as was pointed out in a related column a while back, the recent Harris poll indicates that 39% carry credit card balances and pay interest each month, 39% have no savings or retirement savings, and according to a recent WSJ article 27% are technically in default of the school loans.

    These people are obviously better suited to rent than to purchase a home, and because money is no longer "free" for home purchases, they will be renters.

    A lot of money was made in real estate in the 1970s and if one has a long term perspective, I suspect this is again one of those times.

    However, I'm not rushing in. I think there are other opportunities.

  • Report this Comment On May 05, 2012, at 1:34 PM, gcp3rd wrote:

    Re lowmaple's comment above: Absolutely, and I am not one of those Realtors that blindly says "everyone should buy a house". Not only is that not even possible, but it's not practical, etc. But there is so much dis/misinformation out there regarding finances. If you can be comfortable financially owning your property it will probably end up building much more wealth for you compared to renting, again over the long term. But like Darwood11 says above, it appears a big chunk of us aren't very good at managing any part of our money. Those people are better as renters until they join us! :-)

  • Report this Comment On May 05, 2012, at 3:24 PM, WiseChoice4u2 wrote:

    We own part of a house, the bank the larger part. We also have stock, IRAs, and 100 acres of land with trees that we farm and sell. Being diversified is important. Saving and investing those funds in something that will gain value it important. I don't see much advantage in buying what you can't afford. Hardly ever paid interest on anything, except at times a mortgage on a house with very low payments. My daddy taught me right.

  • Report this Comment On May 06, 2012, at 7:41 PM, JadedFoolalex wrote:

    We are all renters! Everyone purchasing property is a renter. If you have a mortgage, you are participating in a "rent-to-own" scheme. As for renters, you are just paying someone else's mortage and hence their rent!!!

    What killed everyone was the idea that their houses were giant credit cards and when the payments ate their pay-cheques, they were toast! Your house is NOT an investment!!! Your house is a building to shelter you, your family and your belongings from the elements! It should never, ever be used as leverage or collateral! Otherwise, you effectively are "homeless"!

  • Report this Comment On May 07, 2012, at 10:46 AM, ems79 wrote:

    My grandparents bought their last home in 1969.

    20 years later my grandfather died in that home, and 20 years after that my grandmother died in that home.

    The proceeds of the sale of that home represented part of the money that I used to buy my own home.

    The home that I bought most likely won't be the one that I die in, at least I hope not, but it will represent a stepping stone to the one that I eventually do have that happen in. When I die, I want the proceeds of that home to help my grandchildren buy their homes.

    The dream isn't to earn a dollar-measured return on your investment, it's to have a home and enable your progeny to also have a home. The dream isn't dead.

  • Report this Comment On May 07, 2012, at 5:31 PM, BlazerMania wrote:

    Once you include property taxes, mortgage interest, insurance, and maintenance expenses most people will roughly break even on their house after 30 years (assuming a historical rate of return).

    At the end of 30 years, a homeowner will certainly have equity built into his now debt-free house, but it likely won't have made him any money once you net out 30 years of carrying costs and ownership expenses. The value of the asset will be roughly equal to the total costs of ownership. Call it a forced savings account if you like, but it most certainly should not be viewed as an appreciating asset, at least not on a net basis. And if the mortgage interest deduction is ever removed, the math gets even worse.

    We purchased our home last year with a 20% down payment. I love my house and hope to be there for decades. But it is a place to live, not my financial future. I pay for the neighborhood, the schools, for a feeling of permanence and am happy to do so. But there is no question whatsoever that from a purely financial perspective I'd be better off renting an apartment at half the price of my mortgage and investing the difference in an index fund. Would my quality of life be as good, and would my family be as happy? No, I don't think so. But at the end of 30 years I would be in much better shape financially.

  • Report this Comment On May 07, 2012, at 6:55 PM, CaptainWidget wrote:

    Homes are a horrible investment. As it has been clearly pointed out, you're tying up the majority of your net worth into an asset that

    A) Appreciates at 1% a year on average

    B) You have to pay significant sums to maintain

    C) You have to pay the government yearly for the right to "own"

    D) You are tied to...literally. You can't move to a new city for a better job opportunity because your home is exceedingly hard to liquidate.

    I know plenty of rich people who rent. I know plenty of rich people who own as well. But their logic on BOTH sides have nothing to do with the "investment". The ones who rent move often and don't want to be tied down. The ones who own wanted to settle down in one place and set up a base of operations for their life. And both groups are perfectly happy with the fact that both renting and owning are liabilities. They all enjoy where they live...that's what you're paying for...a place to live.

  • Report this Comment On May 08, 2012, at 11:21 AM, WikiCPA wrote:

    Don't forget the fact that homes have other benefits as an investment. For someone who is pulling in $250,000+ a year on a W-2 would pay maybe around $80,000 in taxes. Buy a home, deduct the mortgage interest, taxes, and you could potentially lower that tax bill significantly. Depends on your ability to manage cash flow though. If you move, thats fine, pay a property manager and deduct those costs even more to lower your tax bill. Very easy to do if you can manage your cash flow.

  • Report this Comment On May 08, 2012, at 1:36 PM, mikecart1 wrote:

    Not sure what all the fuss is about owning a home. Owning a home was never my dream. Being stuck in one place and praying that I find a job nearby that I can tolerate for 30+ years is not much different than being in a prison cell.

  • Report this Comment On May 08, 2012, at 1:56 PM, playtothebeat wrote:

    @mikecart1:

    there's a difference between a "job" and a "career".

    many strive to find a "career" which allow them to stay in one place for long spans of time (often 10-20-30 years).

  • Report this Comment On May 08, 2012, at 2:27 PM, kahunacfa wrote:

    By Morgan Housel | More Articles

    May 4, 2012 | Comments (17)

    "In a 2004 speech to the National Association of Home Builders, President George W. Bush perfectly described the attitude of the day: "For millions of our citizens, the American Dream starts with owning a home."

    He went on:

    Home ownership gives people a sense of pride and independence and confidence for the future. When you work hard, like you've done, and there are good policies coming out of our nation's capital we're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.

    And boom went the dynamite. The rest was history.

    With the housing bust and millions of foreclosures over the last five years, a predictable trend is taking place: The homeownership rate is plunging."

    Actually, home ownership can be an ideal goal for many families, yet the actual benefits of home ownership are often way, way over-rated.

    My Uncle Walter, the owner of an Advertising company, cf.: "What Have You Done for Me Lately?" rented most of the time. During my growing-up years, he rented an English Tudor home from the Senior Senator from Illinois. It was a huge property -- but rented. The thing that most impressed me about the house was that it had nine telephones!!!

    One of our first goals coming out-of-graduate school at the University of Wisconsin - Madison was home ownership. We bought a great home just East of the city limits on a full acre of wooded land. The cost? It was a three bedroom 1,650 square feet property with detatched garage for $40K. Financed with a Special State of Wisconsin VA Loan program, $500 down, 30-year fixed rate mortgage at 5.35% when prevailing mortgage rates were 7% or so in 1976.

    We have also, from time-to-time rented properties: 1970-1971, Honolulu, Hawaii, bought a 2 Br. condo for $83K 1971 <still own>, In 1983-1985 rented a classic four bedroom home on a Bluff overlooking Lake Michigan for $1K/month.

    In 1985 bought a fixer-upper for $90K. House built in 1922. Had about 4,700 square feet on three levels. Projects included: New High efficiency natural gas furnace to replace an oil furnace, removed a 1,500 gal. undeground fuel oil tank (#2 diesel ou le gazole, en francais), replaced some plaster myself, added copper rain gutters to replace the then defective gutter system. Attached a wireless alarm system to the copper in multiple locations. Even in the nineteen eighties, "perps" would take copper left unprotected or unguarded, unfortunately.

    The key point is that housing is a Basic Human need, how that need is satisfied makes little difference whether the shelter is owned, rented <leased>, or built out of twigs and long grasses.

    Kahuna, CFA

    Venture Capital

    General Partner

    Kailua-Kona

    2012 - 2019 or 2020

    le 08 mai 2012

    09:27 HST

  • Report this Comment On May 08, 2012, at 2:42 PM, mikecart1 wrote:

    playtothebeat,

    There are also many careers that become better in terms of income and experience that ask you to move to different sites within the company even if it just a lot of travel throughout the year. This time away makes that house less worthwhile as a purchase/investment/dream than if you rented an apartment. I know at my current company, people move all around this country and around the world. People spend 1 or 2 years in Asia and then spend time in Europe and then come back here and repeat. I'd rather have the ability to get rid of the apartment and find a nice place in the country I'm working in. :)

  • Report this Comment On May 08, 2012, at 2:54 PM, playtothebeat wrote:

    @mikecart: in your circumstances, with your employer, home ownership probably doesn't make sense.

    for many others, it makes perfect sense.

    at the end of the day, rent vs own analysis comes down to much more than simple dollars and finances. it largely depends on your personal goals and career plans, your family, your personality, etc.

  • Report this Comment On May 08, 2012, at 3:44 PM, TerryHogan wrote:

    @ CaptainWidget

    I'm sorry to hear that you are 'literally' tied to your home. I will call the cops if you want, they will cut you loose.

  • Report this Comment On May 08, 2012, at 3:52 PM, sikiliza wrote:

    "And boom went the dynamite. The rest was history."

    That's all I have to say about that.

    The problem with dreams you have got to be asleep to experience them but if you go to sleep, they raid your pension, your savings, your homes, your credit.... if it's not nailed down, it's gone.

  • Report this Comment On May 08, 2012, at 4:35 PM, ems79 wrote:

    @mikecart1

    Not everyone shares the same dreams. But, the vast majority of people like the idea of "settling down" in the middle of their lives to raise a family... that typically entails being in one place for a couple of decades.

    Most people also have a job skill they are good at, or some career path. There are surprisingly few doctor/astronaut/fireman/construction worker/mechanics out there. In addition, many areas of the country will allow you to hold hundreds of different types of jobs all within 40 miles of your home, so just because you live in one place doesn't necessarily mean you can't be what you want to be, as long as you have the ability.

    But, clearly staying in one place is not your cup of tea and that's fine, as a I said, not everyone shares the same dream. There have always been nomads.

    To someone like me, the idea of constantly moving around over 30+ years sounds more like a nightmare.

  • Report this Comment On May 11, 2012, at 2:38 PM, ptugger02 wrote:

    Great comments and insights, @JadedFoolax @BlazerMania, @CaptainWidget.

    @mikecart1, comparing a house to a jail cell, lol.

    Buying my first house before the bubble was like my first and only marriage. I became resentful of all the money and attention the house demanded after the honeymoon was over.

    I ended up taking a loan on the house, first wife divorced me, and I defaulted on my house loan after the bubble burst. Now that my credit is shot for a few years, I'm renting a 3 br house that has been completely remodeled. It's like the honeymoon stage all over again. The house is all fresh and not too needy. My new woman the opposite.

    Just for today, I'm grateful to have a roof over my head and have someone that loves me.

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