The rate of individual home ownership is stuck at the lowest point in our lifetime. The trend will be further aggravated in 2017 as interest rates rise, real estate tax incentives diminish, and disposable income falls for the lower half of American households. Yet it remains unclear whether the homeownership issue indicates a serious underlying economic problem or a just shift in social attitudes.
This trend is important to financial advisers because home equity has historically been an important part of individuals’ financial equity. Home prices nationwide have rebounded impressively after a crash in 2006 to a historic high today. Rate of appreciation has been impressive over the past five years. While price appreciation will likely be less impressive in the immediate future, most expect home values to continue to increase.
It is clear from the news reports and anecdotal observation that many younger people cannot afford to buy homes and often do not qualify for a mortgage. That trend is projected to worsen over the next few years with higher mortgage rates taxes and lower net after-tax income of working class Americans.
Yet even among people who could afford a home are choosing to rent instead. If fewer individuals are benefiting from the gain in value, that means that more investors are benefitting from the recent gain in home values. Home appreciation is less about improving Americans’ collective financial security today and more about boosting portfolio returns for the financial elite. This recent article shows how home equity is still important to affluent individuals; that hasn’t changed. It’s just that this gain benefits a smaller portion of people. It reinforces an old theme: “the rich get richer, the poor get poorer”. We could conclude that the drop in home ownership is good for affluent investors and bad for people living on a paycheck.
I have written in earlier blog posts that the rise in effective overall taxes and individual health care costs are the primary driver in the decline in home ownership. I forecast that investor and corporate ownership of homes will increase while ownership among median age and income Americans will continue to decline.
Two things seems clear: 1) working class Americans are less financially secure today than at any other time in my lifetime, and, 2) this homeownership trend is a contributing factor to the decline in working class Americans’ collective wealth.
My focus as a financial adviser is to look for opportunities to enable investors to profit from this trend and to help individuals climbing the economic ladder to afford home ownership sooner.