Is Real Estate Still Americans’ Best Financial Bet?

Buying a home remains the most promising way for people to build wealth—but only because no one has come up with a better alternative.

National Journal
Nancy Cook
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Nancy Cook
Feb. 6, 2015, 12:47 a.m.

Ri­cardo and Den­ise Cab­rera were so burned by the last hous­ing crash that it is hard to be­lieve they’re vy­ing to be­come homeown­ers again.

In 2005, the couple bought a starter home for $490,000 just out­side of Los Angeles through a no-money-down, in­terest-only loan. By 2009, after the mar­ket crash, that same home was worth roughly $150,000 less. The couple de­cided to do a short sale to get out from un­der­neath their mort­gage. The only prob­lem? It pre­ven­ted them from pulling any equity out of the house; just as bad, it marred their high cred­it scores. “We walked away with noth­ing,” Den­ise says.

Now, after five years of rent­ing, the Cab­reras are once again put­ting their faith (and sav­ings) in­to the hous­ing mar­ket — this time, through a 10 per­cent-down mort­gage on a five-bed­room, Cape Cod-style house in the San Fernando Val­ley, on the edge of Los Angeles. The seller ac­cep­ted the couple’s bid of $530,000, after re­ceiv­ing roughly 20 oth­er of­fers, Ri­cardo says. With the prop­erty now in es­crow, the Cab­reras and their chil­dren, ages 9, 5, and 4, hope to move in by the end of Feb­ru­ary. “For me, the house is something we can pass on to the kids,” Ri­cardo says. “Pay­ing rent is just like throw­ing your money away.”

The ideal of Amer­ic­an home own­er­ship may have been tar­nished dur­ing the re­ces­sion, as the val­ues of so many homes plummeted and the num­ber of fore­clos­ures across the coun­try soared. But for many Amer­ic­ans, like the Cab­reras, the emo­tion­al rush of buy­ing a home still rep­res­ents a sig­ni­fic­ant mark­er of sta­bil­ity and fin­an­cial suc­cess. Buy­ing of­ten gives fam­il­ies ac­cess to safer neigh­bor­hoods, bet­ter schools, and more ser­vices than rent­ing. And, like it or not, home own­er­ship still of­fers the best way to save money for the ma­jor­ity of Amer­ic­ans by build­ing up equity, es­pe­cially in this era of dwind­ling pen­sions and stag­nant wages. “It is a forced sav­ing mech­an­ism, and if you don’t have to think about sav­ing, it goes bet­ter,” says Brett Theodos, a seni­or re­search as­so­ci­ate at the non­par­tis­an think tank, the Urb­an In­sti­tute.

That’s why eco­nom­ists and poli­cy­makers worry so much about the fact that the hous­ing mar­ket has yet to fully re­cov­er. Cred­it has be­come so tight that bor­row­ers who may have enough in­come to cov­er their costs, but who do not have per­fect cred­it scores, re­main locked out of the mar­ket. And, few­er Amer­ic­ans in the af­ter­math of the glob­al fin­an­cial re­ces­sion are cre­at­ing new house­holds, opt­ing in­stead to bunk with fam­ily and friends.

The over­all res­ult has been a dra­mat­ic de­crease in Amer­ic­an homeown­er­ship. In 2013, the U.S. homeown­er­ship rate fell for the ninth straight year, clock­ing in at just 65.1 per­cent, the low­est level since 1995, ac­cord­ing to the Joint Cen­ter for Hous­ing Stud­ies at Har­vard. First-time home­buy­ers, young people, and minor­it­ies par­ti­cip­ate less and less in the hous­ing mar­ket. The big philo­soph­ic­al de­bate is when, if ever, they’ll come back and what that will mean for their wealth over the long run.

In Janu­ary, the Fed­er­al Hous­ing Ad­min­is­tra­tion an­nounced a plan to cut mort­gage in­sur­ance premi­ums in an ef­fort to nudge more buy­ers in­to the mar­ket, par­tic­u­larly first-time bor­row­ers. The FHA es­tim­ates that move will save homeown­ers roughly $900 an­nu­ally on their mort­gage pay­ments. Even so, this is un­likely to be enough of a salve to boost the en­tire mar­ket.

Even if the rates of home own­er­ship do re­turn to their pre-bubble levels, ex­perts and ad­voc­ates ac­know­ledge that home buy­ing re­mains an im­per­fect crutch to boost wealth. Too many Amer­ic­ans re­fin­anced their homes dur­ing the 2000s, pulling out money and us­ing their homes as piggy banks, enough to make hous­ing less of a sure­fire fin­an­cial bet. “This is less of a story that home own­er­ship is per­fect and more of a story about, ‘What oth­er vehicles are out there to help people build wealth over the course of their life­times and over gen­er­a­tions?’” Theodos says. “Private sav­ings isn’t do­ing it.”

Hous­ing ex­pert, Sarah Edel­man of the lib­er­al-lean­ing think tank, the Cen­ter for Amer­ic­an Pro­gress, ar­gues that poli­cy­makers need to take a two-pronged ap­proach to home own­er­ship. First, they must ac­know­ledge the value of people build­ing up equity in their homes. And second, poli­cy­makers should con­tin­ue to pur­sue oth­er ap­proaches to help both first-time home­buy­ers and renters save. “The ma­jor­ity of first-time home buy­ers may not be able to come up with a 20 per­cent down pay­ment,” she says. “For the fu­ture health of the hous­ing mar­ket, we must make sure fam­il­ies who can af­ford to buy a home do.”

In­creas­ingly, that means that private com­pan­ies, non­profits, and even the fed­er­al gov­ern­ment are ex­per­i­ment­ing with new ap­proaches: from meas­ur­ing people’s cred­it­wor­thi­ness in a broad­er fash­ion to pro­grams that en­cour­age renters to auto­mat­ic­ally save with the hope that they’ll even­tu­ally turn in­to homeown­ers. Oth­er pro­grams help un­der­wa­ter homeown­ers modi­fy their mort­gages, a last­ing leg­acy of the glob­al fin­an­cial re­ces­sion. Some non­profits have even de­veloped pro­grams to share the equity in homes and apart­ments, as a way to both spread both the up­side and risk.

Yet all these ab­stract policy is­sues mat­ter little to the Cab­reras, as they ex­citedly talk about the pur­chase of their second home. After years of rent­ing, they’re look­ing for­ward to the pri­vacy and sta­bil­ity that home own­er­ship of­fers. They want to make cos­met­ic changes to their home, and they’re look­ing for­ward to be­ing able to have pets and watch their chil­dren grow up in just one spot.

Most im­port­antly, they view their new Cape Cod-style house as the best as­set they have to leave to their chil­dren. “I don’t know what the hell the mar­ket will be like in the fu­ture,” Den­ise says. “But I want to provide something for them.” That’s ex­actly the sen­ti­ment that keeps Amer­ic­ans re­turn­ing again and again to home own­er­ship.

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