Home Ownership No Longer a Foolproof Investment

Research suggests more and more people in the U.S. are choosing to rent despite being able to afford a home. Prices continue to slip with few signs of …

Research suggests more and more people in the U.S. are choosing to rent despite being able to afford a home. Prices continue to slip with few signs of improvement in the foreseeable future, and potential homebuyers see the benefit of paying cheaper rent and taking money they would normally spend on a mortgage and putting it in a more secure investment. Members of the housing industry hope things will turn around, but as more people decide not to buy home prices become further depressed, creating a cycle that may be hard to break. For more on this continue reading the following article from Money Morning.

Owning a home has long been a goal for many Americans, but now more people consider U.S. homeownership a poor investment choice and are kissing that plan goodbye.

Since the housing market collapsed in 2008, forcing millions of underwater homeowners out of their houses, real estate has become a scary and unreliable investment option.

"The emotional scars left by the collapse are changing the American psyche," Pete Flint, chief executive of real estate Website Trulia.com, told The New York Times. "There was a time when owning a home was a symbol you had made it. Now it’s OK not to own."

The rate of U.S. homeownership is down to 66.4%, the lowest since 1998, according to the U.S. Census Bureau. Some experts say it could fall to the level of the 1980s, or earlier.

U.S. home prices keep sliding as many Americans decide owning a home is not for them. Prices this week fell to their lowest level since 2002, according to the Standard & Poor’s Case-Shiller Home Price Index, erasing some of the gains made since the record low reached in 2009’s first quarter. Prices are down 33.1% from their July 2006 peak.

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Some see falling prices as a great opportunity to take advantage of the troubled market and buy a house. But many would-be buyers are leery of investing in houses that are unlikely to appreciate any time soon. The number of Americans who think buying a home is a safe investment has fallen to about 66% from 83% in 2003, according to a national survey by Fannie Mae released May 11.

Instead, many choose to rent.

"They’re renting and they’re happy renting because they’re scared," Douglas C. Yeardley Jr., chief executive officer of luxury homebuilder Toll Brothers Inc. (NYSE: TOL), told The Times.

Even though many Americans can afford to buy homes at the current near-record lows, they prefer the benefits of renting to the commitment of owning a home. Renters have the flexibility of not being tied to a certain location, should they have to move to find work or a more affordable place to live.

"We have more of what we call ‘renters by choice’ than I’ve seen in the 40 years I’ve been in the apartment business," Jeffrey I. Friedman, chief executive of Associated Estates Realty Corp. (NYSE: AEC), told The Times.

Renters pay less each month than if they had a mortgage, and use the extra money for savings and other investments that offer better returns than buying a house.

"For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership," Jordan Rappaport, senior economist at the Federal Reserve Bank of Kansas City, told The Times. Rappaport found in a recent study that homeownership only half the time builds more wealth than other investing techniques.

But some housing industry members remain hopeful the goal of owning a home is not dead, just on hold.

"Most people still want the big house with the big lot in the desirable school district in the suburbs," said Toll Brothers’ Yeardley. "No one ever renovated the kitchen or redid a room for the kids in a rental. I think – I hope – we’ll be O.K."

This article was republished with permission from Money Morning.

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