Renters Win, Home Owners Lose

PREFACE

In July 2008, my son called me to share his long, anticipated accomplishment. The day before, he and his wife had just closed escrow on their first home. To say the least, they were excited. But more than the words he spoke, I felt his contentment through his controlled breathing as he took the time to explain the logic behind his action. In short, he told me the timing was right, the price was unbeatable, and prospects of any future resale looked promising. “Congratulations, Thomas!” I said, feeling genuinely happy about their achievement.

Based on our cultural blueprint, my son and his wife (Nicole) are well ahead of the typical home ownership-purchasing curve. Before age 30, they had purchased their first home. Few Americans can say the same. Home ownership becomes a reality later in life for most people because of costs and timing.

I wish them success on their journey through home ownership and hope that the home fulfills all their expectations. However, I must confess a small degree of caution about their purchase. After ending my phone conversation with Thomas, I couldn’t help but think that their decision has placed them in a very common, cultural groove or pattern—one that bears an impressive title, but has proven to be financially unprofitable for the masses.

The desire to own a home in the American culture is predominantly driven by the prospect of financial wealth. An overwhelming majority of Americans believe that homes hold the key to their financial future. This belief is encouraged not only by the housing industry, but also by our government and the media.

Nonetheless, there is a prevailing body of evidence showing that homeowners are not necessarily financially better off than renters. Indeed, renters who make an average effort with an investment program can beat the financial outcome of most homebuyers in the United States.

The home ownership concerns addressed in this book have little to do with economic conditions. The concepts hold true in both a good or bad economy. Our current depression, which began in late 2005, is cited, but only to depict a general attitude among us when things go bad. Yet, the financial industry (specifically the mortgage component) has been a major contributor to our economic demise. It is documented that banks and mortgage companies made loans to people with low credit scores and inadequate means to repay the debt, thus, resulting in a gradual economic meltdown.

Prior to the crash, the economy was red-hot, and many attributed the growth to the housing market. At the time, the industry was doing better than excellent. For instance, in the mid-nineties, the home ownership rate grew steadily, but hovered around 65 percent.  But by the end of 2005, industry figures showed record-breaking home sales which skyrocketed the home ownership rate to 68.9 percent. The 3.9 percent increase was enough to shatter all records within the housing industry. 

Today, most Americans are broker than ever, and they know it. In March 2008, the Federal Reserve reported that home equities had dropped close to 50 percent, the lowest since 1945. And in June 2008, home prices had plummeted to 15.3 percent. At the time, some people forecasted a continued decline in home prices in the coming months; that has become evident. 

This may be purely coincidental: but some people were intrigued by the fact that as housing sales fell, homebuilders’ stocks were steadily rising. In February 2008, the Standard and Poor’s Building Index was up 24.6 percent, making it the top performing industry in 2008. The three big winners were Pulte, at 51 percent; D.R. Horton, at 30 percent; and KB Home at 26 percent. The cumulative home building stocks between 2000 and 2005 increased to 1,400 percent. In other words, while millions of home owners were crying for help, a few companies in the housing industry were making a lot of money. 

But this is nothing new. Long before the crash, most Americans lost money on the homes they purchased, but they didn’t know it.  Disregarding the typical swings in the real estate market that cause home prices to rise and fall, there are three major contributing factors to the financial loss connected to home ownership: (1) an overwhelming obsession to own a home, (2) the general lack of understanding of real estate finance, and (3) the mortgage itself. When these are combined, the masses are taken for a real estate experience that they’ll never forget. After purchasing several homes, 30 years later, most homeowners are poorer than they were prior to buying their first home. Then, the so-called “American Dream” becomes nothing more than a nightmare. 

A journey through this book will awaken your senses about the home ownership gambit. At the end, you will be several steps ahead of the masses as you contemplate your housing options between buying and renting.