Home ownership, the American dream, or is it? Last month, we discussed how many seniors are simplifying their lives and downsizing their homes, oftentimes foregoing home ownership altogether to become renters.
The Federal Reserve recently reported that the increasing real estate prices are building home equity. The Fed says that the equity Americans have in their homes in the first quarter of 2015 is at 55%. This is a sharp increase from 38% in 2011, which was the lowest rates since World War II. It is however, still lower than 15 years ago when the average American homeowner’s equity was 61%.
Although home equity is increasing, so are mortgage foreclosures. Mortgage foreclosure filings in May 2015 were up 16% over May of 2014. This is a 19 month high. Bank repossessions of homes after foreclosure in May 2015 were also up by nearly 60% over a year ago. They were less than half of the peak of September 2013, but still nearly double the average monthly rate in 2005 and 2006.
Despite this bleak report, a Wells Fargo and Ipsos Public Affairs survey released last month found that 65% of all Americans still see home ownership dream come true or an accomplishment to be proud of. You want to build equity in your home to build your home investment. Typically when you pay down on your mortgage, your equity goes up. But this has not always been the case since 2007. 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 retirement. 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 really 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 Harvard University’s Joint Center for Housing Studies report released last month shows that approximately 63.7% of Americans own their own home. This is following ten straight years of home ownership declines from our all-time high of 69% in 2004. Some experts are saying that homeownership is going to reach a low of 62%, 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. A recent Census Bureau report states that 13% of U.S. housing units were vacant in the first quarter of 2015. Right now it is reported that there are more than 42.2 million rental households in the United States. Yale University economics professor and Nobel laureate Robert J. Shiller states “It’s more of a new normal. We went through a wrenching experience with the biggest housing bubble and the biggest collapse since 1890. This is an anxious time.”
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, there is continuing debate over the misconception that owner-occupied homes are better for neighborhoods than rentals. Experts, including Professor Hockett, state 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, or even rent. By keeping your financial obligations lower, you can 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 July 5, 2015 in The Times Herald, Port Huron, Michigan as: Is your home an asset or liability?