More and More High-Income Earners Giving Up the Dream
Home ownership is considered to be a significant part of the American dream, but more and more of us are being forced to give it up, even those who make a lot of money.
Traditionally, lower income people have always represented the biggest percentage of renters, for a number of good reasons. While owning your own home is part of the American dream, many Americans simply cannot achieve this dream, and the biggest reason is lack of cash.
There are a lot of significant advantages to owning one’s own home, and especially to become a landowner. It’s the land that goes up so much in value when you look at how much the value of real estate goes up over time, which anyone who has owned a mini-home on leased land will attest to.
This example is very illustrative of this principle, because while people may own their own mini-homes, these homes actually depreciate over time, as other chattels tend to do, like cars or recreational vehicles do, due to depreciation.
Market demand does factor into this, competing for scarce resources, but building materials and labor aren’t so scarce, but land sure is, especially land in proximity to areas where a lot of people work. Owning land with property on it is a source of a lot of people’s wealth, wealth that can be also leveraged when needed to borrow money against the equity that has been built up over the years, or sold to build a solid nest egg for one’s retirement years.
Owning your own property does also come with more autonomy than renting does, even though this isn’t complete say-so, as we still have to abide by things like covenants, zoning restrictions, by-laws, and other conditions that may apply to home ownership.
The line with real estate ownership used to be pretty much defined by owning a single dwelling with owners versus renting an apartment, but this has been really blurred by the huge growth in condominiums. The experience of owing a condo or renting are actually pretty similar these days, other than renters not building equity like condo owners do.
This demonstrates that it’s not just about the land, and you don’t really own land directly, but you do own a stake in it generally, and that along with the fact that you do own the physical space the condo takes up is enough to make these purchases pretty lucrative over time financially.
Owning Your Home Requires Enough Capacity
It’s simply better to own than rent, but owning requires more resources, such as access to a down payment, at least a decent credit rating, and the means to service both the mortgage and the property. It also requires a much bigger commitment than renting, and although renters do usually sign leases, you can wait for it to expire and move on or even break the lease, but owners do not enjoy this sort of mobility.
It’s not all this one sided though, as this luxury of mobility does matter to some people, especially those who require more of this. Someone may also not want to tie up assets in a home if they have other plans for the money, even though few investments can compete with the returns that home ownership provides.
It’s not even the rate of return that makes home ownership stand out so much, it’s the fact that you are not investing your own money, you are investing borrowed money and receiving a return on the entire value of the home. You’re also paying down the principal with your rent money so to speak, where eventually you’ll own the whole thing, all of its accrued value over the years, versus having nothing to show for your money when you rent.
With all this going for it, you would think that just about everyone should be owning if possible, especially those that enjoy high incomes and can afford it. It therefore may be surprising to learn that more and more high-income earners are renting, and that those who earn more than $150,000 per year represent the fastest growing segment of renters these days.
Among this segment, between 2007 and 2017, according to a recent study by RentCafe.com, home ownership grew by 67%, while renting grew by 150%. The number of high-income renters has grown to 2.1 million, up from 774,000 in 2007. While this is only a fairly small percentage of the 43.3 million renters overall, the number of people who make this much is a much smaller percentage as well, and one that really is moving more toward renting.
Tendaya Kapfidze, chief economist at Lending Tree, tells us that “there has been a change in attitude toward home owning after the financial crisis, particularly among higher income households.”
This may indeed explain part of this migration, as higher income people tend to have more to lose if things go wrong, and things went plenty wrong during the housing crisis of 2007. The fact that this study used that year as its entry point is probably no coincidence, because this is where we saw people become more reluctant to own and is probably the high-water mark of people jumping into this with both feet and few cares.
Another study conducted by Harvard University confirmed these findings, this time using $100,000 a year as the cutoff, and discovering that 2.6 million more of these people are now renting in the period between 2012-2017.
The Bar Just Keeps Rising
It’s just not only people that are more concerned about the risks of buying, as lenders have really tightened up standards since the housing market crash. Prior to this, even having a job wasn’t much of a barrier with some lenders, but we saw first-hand what can happen when just about anyone can get a mortgage, as this mountain of sub-prime mortgages ended up really bringing the house down.
Perhaps the biggest reason why we are seeing this trend so much is that people who make a lot of money tend to live in places with high real estate prices. $100,000 might seem like a lot of money to those who make much less, but if the price of homes rises enough, this can make this unaffordable.
The median price of a home in America has risen a fairly modest 30%, to a fairly modest $233,000, but in peak areas, the rise in price has been far more dramatic. In San Francisco, for example, home values have almost doubled during this time.
The cities tend to be where most of these high paying jobs are, and these higher income earners are all competing with each other over the same properties, and people are getting pushed further to the periphery, where in spite of long commutes, competition can still be pretty fierce.
Some affluent people may simply choose not to buy, but more and more of them are actually being priced out of the market. The competition isn’t just limited to the local market, as a lot of money from abroad has entered the stream, especially on the West Coast, which increases demand and price along with it.
The city of the future may indeed be more compact, seeing us move further away from single family dwellings in favor or more high rises, whether people buy their own apartments or just rent them. There is still a significant desire to own a piece of America that you can call your own, but more and more of these people are seeing that the opportunities here are waning, and even owning your home altogether is becoming more and more out of reach for more and more of us.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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