Home ownership, the American dream, or is it? The Federal Reserve recently reported that the falling real estate prices are eating away at home equity. The Fed says that the equity Americans have in their homes in the first quarter of 2011 is at the lowest rates since World War II, at 38%. A decade ago, the average American homeowner’s equity was 61%.
It is reported that there are nearly 75 million Americans in the United States that own their home. Most statistics show that about 60% of those homes are subject to a mortgage. The bad news is that with falling home prices, about 25% of the homes with a mortgage are underwater, which means that their mortgage is greater than their value. It is also reported that another 25% of those homeowners with a mortgage have little equity and are in danger of going underwater.
Despite this bleak report, surveys continue to report that 70% to 75% of all Americans still see home ownership as a wise investment. You want to build equity in your home to build this investment. Typically when you pay down on your mortgage, your equity goes up. But this has not been the case over the last several years. Falling housing prices have offset the payments on your mortgage.
Your home is your investment in an asset, right? Homes are listed as assets on your personal financial statements you file with the bank for loan purposes. But is your home truly an asset or is it more of a liability?
Generally assets represent an ownership of property that is cash or can be converted to cash that can be used to generate economic benefits. A liability is generally considered an obligation requiring the use of assets. Simply put in non-technical terms, assets create income, liabilities create expenditures.
For the benefit of owning your own home, you have acquired a number of financial obligations, the largest of which is usually your mortgage payments. Even if you have no mortgage payments, you still have other household expenses. There are expenses for insurance, maintenance, upkeep, repairs, real estate taxes, assessments, etc. The bigger the home, typically the bigger the expenses.
One of the biggest temptations you may have in buying a home is to buy the largest home which you could possibly afford and qualify for financing. If you are now putting all of your excess income into your home, then you are not putting any into savings or other investments. You have also increased your monthly financial obligations.
Even if you have lots of equity in your home, that equity is not generating any income for you until you sell. When you do sell your home, it is then converted into cash and can generate income. This is the time that your home can truly be called an asset.
Maybe it is time to rethink how we look at our assets and liabilities and at home ownership versus renting. Are your “assets” income producing or non-income producing. An asset such as a home that is not generating income is a financial obligation. As a financial obligation, isn’t that what a liability is? And even if you own your home free and clear, you are still “renting” your home by paying annual property taxes. If you do not pay your “rent”(taxes), you can be evicted.
A 2010 census report shows that approximately 66.5% of Americans own their own home. This is the lowest rate since 1998 and significant decrease from our all-time high of 69% in 2004. Even at 66.5%, we are still a percentage point or two above the rates that were prevalent from the 1960’s to the mid-1990’s. Some experts are saying that homeownership is going to reach a low of 62% in 2012, which would be the lowest rate since 1960. New research indicates that this is just returning to more normal levels of home ownership.
As home ownership decreases and foreclosures increase, vacancies and rentals increase. The recent census report states that 10% of U.S. homes were vacant in 2010. Right now it is reported that there are approximately 39 million rental households in the United States. According to a recent study by the Joint Center for Housing Studies at Harvard University, this amount will increase nearly 10% to 42.6 million households by 2020.
According to Robert Hockett, a law professor at Cornell University as reported in the Christian Science Monitor, home ownership for the majority of Americans is a recent phenomenon. Professor Hockett states that in the 1930’s, fewer than 40% of adults in American households owned their homes. Only after the Hoover and Roosevelt administrations made some regulatory changes in the home mortgage industry did the home ownership rate go up.
In Port Huron, as is across the nation, the debate between which is better, homeowners or renters is raging. Professor Hockett states that the long-held belief that homeowners have a stake in the community and therefore contribute to making it safer, cleaner and a more pleasant place to live is overblown. Home ownership isn’t the panacea for neighborhood improvement and social good as was once thought to be.
Professor Hockett states that it is whether the homeowners or renters think of themselves as stakeholders is what makes the difference. A homeowner or renter who is planning on staying in the neighborhood for the long haul is a stakeholder. Transients, on the other hand, would not be considered stakeholders. For example, long haul renting is an everyday occurrence in places like Manhattan, which is very stable.
So what do you do, rent or buy? Take a look at your own situation to see what would be most appropriate for you. Run the numbers and see what you can truly afford.
For some of you, it may be wiser to be building up your income producing assets and minimizing your non-income producing assets and other liabilities. Instead of buying the biggest home you possibly could afford, maybe you ought to buy a little smaller, keep your financial obligations lower and put aside income into savings which can be income producing. Work on keeping your assets, especially income producing assets, higher and your liabilities lower.
By: Matthew M. Wallace, CPA, JD
Published edited June 26, 2011 in The Times Herald, Port Huron, Michigan as: Asset or liability?