Home Ownership

Abstract

Owning one’s home has long been considered a key feature of the American Dream and middle-class success in the United States and an important means of building wealth. The housing market is often seen by economists and the business community as an indicator of the overall strength of the American economy. In 2008 and 2009, the housing market in the United States experienced a sharp decline that led to a severely weakened economy. Younger Americans may be less interested in pursuing home ownership than previous generations, and Economists and social theorists have begun questioning whether home ownership is as desirable or necessary as it was once thought to be.

Overview

Home ownership is a form of residential living in which the occupant of a housing unit owns his or her dwelling as opposing to renting or leasing the unit from a third party. Rental property owners, or landlords, may be individuals, businesses, or real estate agencies. In the United States, home ownership has long occupied an almost mythical status in the public consciousness as a symbolic hallmark of the so-called American Dream, even though home ownership entails a series of responsibilities that renting does not. For example, individuals who own their homes assume full responsibility for upkeep and maintenance of the home, paying for any necessary repairs that home may need, assuming the full costs of all utilities (e.g., water, sewer, trash, electricity, gas) associated with the home, direct payment of property taxes on the home and land, paying any required home owner’s association fees, and ensuring that the home meets local, state, and federal safety standards and regulations before it can be sold, if the home owner decides to put the home on the market for sale.

For most American home owners, their housing property is their single greatest financial investment and asset. Because homes are often the greatest financial purchase that individuals make, and because purchasing and maintaining a home almost always requires the services of other business entities (such as real estate agencies, home inspectors, building contractors, electricians, and plumbers), home ownership is a cornerstone of the American economy. The strength of the housing market is often interpreted by economists as a barometer of the strength of the overall economy. President George W. Bush declared June to be National Homeownership Month in 2003.

Owning one’s home has historically been viewed by Americans as a symbol of middle-class success and a key step toward building and accumulating wealth. This is because one’s monthly mortgage payment is usually less expensive than what one would pay in rent per month, and the payment increases the home owners share of the home’s value, or equity, by reducing the amount owed on the loan. Further, homes typically appreciate, or increase, in value over time. Persons who purchase homes with mortgages that feature a fixed interest rate do not incur annual increases in their monthly payment in the manner that those who rent homes or apartments do. Though property taxes usually increase with the home’s value, the amount of increase is typically smaller than the annual increases that landlords impose on renters. Given these two economic incentives, cost of housing and appreciation of equity over time, it is easy to see how owning a home can be prized as an ideal way for an individual or a family to build wealth.

Despite home ownership’s longstanding centrality to the American Dream, the United States does not have the world’s highest rate of home ownership. In fact, the United States ranked 33rd out of a list of 42 selected nations in terms of the percentage of citizens who own their homes, according to a report issued by the Pew Research Center in 2013. In 2013, 65 percent of Americans were home owners, compared with 96.6 percent of Romanians, 92.3 percent of Lithuanians, 84 percent of Norwegians, 72.9 percent of Italians, 71.1 percent of Mexicans, and 69 percent of Canadians. Some have attributed this relatively lower rate of home ownership to considerably higher costs of housing in the United States, although a variety of factors are probably contributing to this trend.

However, the 65 percent of home ownership among Americans must be properly contextualized, as there are glaring racial and ethnic discrepancies in the percentages of whites, blacks, and Latinos in the United States who own their homes. Whites have significantly higher rates of home ownership than either blacks or Latinos, as 73 percent of whites owned their homes as indicated by a 2011 report cited by Forbes. In contrast, just 45 percent of blacks and 47 percent of Latinos were home owners. In 2008, 59 percent of Asian Americans owned their homes. Several factors account for this wide disparity in home ownership, including past and present bank practices of redlining, racial discrimination in the housing market, and federal policies in the 1930s and 1940s that increased rates of white home ownership while allowing banks, real estate agencies, and home owners associations to engage in racial discrimination against minority home applicants.

Redlining is a practice in which banks refuse to grant loans to individuals living within certain neighborhoods of towns or cities; the term alludes to the historical practice of taking a red pen and, quite literally, circling a section on a map that is to be excluded from its residents being approved for housing or personal loans. Redlining practices have traditionally been applied to lower-income and predominantly minority sections of urban areas, thereby disqualifying individuals from approval for home or other loans regardless of their individual finances. Although illegal today, redlining practices still sometimes continue, as evidenced by a $27 million fine issued to Hudson City Bank by the Consumer Financial Protection Bureau and the Department of Justice in September 2015 for allegedly denying mortgage loans to residents of predominantly black and Latino neighborhoods in Connecticut, Pennsylvania, New York, and New Jersey.

The Federal Housing Administration (FHA) was created in 1934, amid the Great Depression and a massive decline in real estate property values, to increase home purchases. The FHA provided banks with insurance on special types of mortgage loans in an effort to encourage banks to offer home loans to a larger number of applicants by making the loans, essentially, risk-free; a lender would recover the financial losses it might incur if a home owner defaulted on an FHA-backed loan.

The Serviceman’s Readjustment Act of 1944, passed by Congress and signed into law by President Franklin D. Roosevelt, also dramatically increased the number of home owners in the United States by providing a series of federal benefits for military veterans returning from World War II. Among these benefits were low-interest mortgage loans, guaranteed by the federal government, for veterans to purchase homes. The federal government did not directly issue the loans to veterans; rather, it agreed to assume responsibility for payment of the loan if a veteran defaulted or failed to repay the loan. Historians and sociologists credit the 1944 act as a major factor in building the suburban white middle-class of American society, as millions of white veterans took advantage of these loans and relocated from urban or rural communities into the newly-created suburban housing communities during the late 1940s and 1950s. Sociologists often refer to the massive relocation of white Americans from the nation’s cities to the suburbs during the post-war years as white flight; as millions of whites moved to the suburbs, the majority of blacks remained largely confined to the inner-city. This was, to a large degree, due to the fact that neither the 1934 nor 1944 legislation contained anti-discrimination provisions that prohibited banks from excluding blacks or other minorities from equal consideration when applying for home loans. Such an arrangement allowed redlining to flourish, and it was not uncommon for home owners associations, especially in the north and midwest, to have policies that prohibited the sale of houses to non-white customers. The Fair Housing Act of 1968 officially outlawed these practices by making it a federal crime to engage in any form of housing, home loan, or rental practices against individuals on the basis of race, sex, or religion.

Although housing discrimination is now illegal, the ramifications of decades of racial discrimination in America’s housing markets have produced disparities in home ownership and wealth that were still evident in 2015. Whites who purchased homes in the 1930s and 1940s obtained houses at a time when the costs of buying a home were considerably lower; the values of these homes increased tremendously after the 1970s, as anti-discriminatory legislation finally enabled large numbers of African Americans to pursue home ownership. The two- to three-generation head start that many white families had relative to black families in terms of home ownership accounts for the wide gap not only in home ownership rates between whites and blacks, but also the tremendous gap in wealth. Defined as an individual’s or family’s net worth, calculated by subtracting the total amount of debt from the total value of assets, the wealth gap is generally widest where families have not built wealth through home ownership. In 2011, the median wealth of white households was $111,146, while the median wealth of black households was $7,113 (Shin, 2015).

A variety of types of loans are available to individuals considering purchasing a home. The most common type of loan is a 30-year loan; these loans come with either fixed interest rates or variable interest rates (called ARMs, for "adjustable rate mortgages"). ARM loans offer certain advantages to home owners, particularly in that they typically feature very low interest rates during the first few years of the mortgage, but the adjustable rate means that the interest rate will be readjusted—and quite possibly increased—after a certain number of years. Financial experts often suggest that ARM mortgages are most suitable for persons who only plan to live in a house for a few years.

FHA loans are still available to assist first-time home buyers; these loans are beneficial because they allow individuals to secure a mortgage with a down payment of only 3.5 percent of the total cost of the house (the standard down payment for other types of loans is 20 percent). However, new regulations established in the past decade require recipients of FHA loans to also purchase private mortgage insurance (PMI) to ensure against losses that a bank lender would incur if the home owner defaults on their mortgage. The cost of private mortgage insurance can range from $90-$150 a month, thus imposing an additional expense for home owners. Finally, 15-year and 20-year mortgages are also available. These shorter mortgages mean that home owners will pay significantly higher monthly rates, but they will pay much less in interest over the lifetime of the mortgage.

Viewpoints

The housing market bubble, which occurred from late 2007 until 2009, resulted in millions of Americans losing their homes through an inability to pay their mortgages. The rapid and high rate of owners losing their homes devastated many entire housing communities by flooding the market with foreclosure auctions and "short" sales, in which home owners were permitted to sell their home for less than the amount they owed, thereby decreasing the values of homes nationwide. The housing crash led to a major downturn in the economy and an increase in unemployment.

From the mid-1990s until the mid-2000s, the U.S. housing market boomed, and amid a strong economy, banks increasingly became more relaxed in their lending practices through issuing subprime mortgages—a type of loan that is offered to persons with lower credit scores and less financial security. These loans also sometimes have high interest rates, additional fees, and stipulations that borrowers cannot pay more than the minimum due on their monthly payments. These policies are sometimes referred to negatively as "predatory lending." The crashing of the housing market in the late 2000s has been attributed, in large part, to the escalation of subprime mortgages and the inability of many home owners to repay them. As a result of the housing crash, the banking industry and federal government established a series of new guidelines for persons seeking mortgage loans. These reforms include enhanced screening of a mortgage loan applicant’s credit rating and income level, raising the down payment on an FHA loan from 3.0 percent to 3.5 percent, mandating private mortgage insurance, and greater reluctance to grant mortgage loans to persons with credit scores below 640 (Curry, 2013).

The housing crash reignited the debate over whether renting or buying a home is more desirable or suitable for life in American society in the twenty-first century. In a controversial 2010 op-ed, provocatively titled "Home Ownership Is Overrated," published in the Wall Street Journal, economist Richard Florida argued that home ownership was better suited for the 1950s and 1960s, when the nation still featured a manufacturing-based, industrial economy and Americans could realistically expect that they would work a single career for the remainder of their lives. In the new economy, Florida claims, Americans will likely change careers several times over the course of their working years, and this requires Americans to be more mobile and willing to relocate as job openings appear around the country. The ability to quickly and easily relocate becomes significantly more cumbersome when an individual or family has planted roots by purchasing a home. Florida also recommended that the federal government and real estate agencies consider converting the hundreds of thousands of foreclosed houses and condominiums confiscated during the housing market bubble into rental units (Florida, 2010).

Others disagreed with Florida’s assessment and continue to consider home ownership a worthy investment for Americans. For example, Anand Chokkavelu acknowledges that home ownership does, at times, pose certain unwanted expenses (such as the cost of necessary repairs and renovations), but he points out that home ownership still remains the number one source for wealth accumulation for most Americans, that most homes appreciate in value over time, and that the amount of money a home owner pays on a monthly mortgage represents a personal financial investment, whereas monthly rent payments contribute nothing in terms of building wealth. Chokkavelu points out that a typical home owner without a high school diploma has three times the amount of money saved than a typical renter with a diploma and that lower-income Americans who own their homes have a higher net wealth than lower-income Americans who rent (Chokkavelu, 2013). Others point out that renting a home may not allow Americans to relocate any more easily, as Florida suggests, as renters usually sign yearly leases and must pay high fees to a landlord or rental agency if they break the terms of the lease.

At the same time, various sociological research indicates that home owners generally exhibit higher rates of civic participation, and are more socially invested in their communities than are renters. Compared with renters, home owners are more likely to vote, to attend a religious house of worship, to participate in their parent-teacher association meetings with their local school district, and to feel a higher sense of belonging to their respective neighborhood. Nearly 70 percent of home owners vote, while less than 45 percent of renters vote. Children of home owners generally earn higher grades in school than children of renters, are more than twice as likely to attend higher education than children of renters, and daughters of home owners are less likely to become pregnant during their teenage years than daughters of renters ("Shelter, or burden?", 2009).

Nevertheless, research data also reveals that home ownership may not hold the same idealistic appeal for Americans that it once did. A 2015 survey conducted by the American Institute of CPAs indicated that 51 percent of Americans considered either having enough money for a secure retirement or being able to put their children through college as their number one measure of "financial success," while just 11 percent cited home ownership as their top indicator of financial success (Dickerson, 2015). Among Millenials—the generation Americans born between 1981 and 1997—the belief in home ownership as a central component of the American Dream appears to be decreasing. Two-thirds of Millenials surveyed believe that renters can be as successful as home owners, while only 50 percent of senior citizens shared this view (Cramer and Schreur, 2014). Other surveys reveal that 40 percent of Millenials do not feel that they could afford a down payment on a house, while 47 percent of Millenials do not believe they would qualify for a home loan (Dickerson, 2015). Some experts attribute the high amount of student loan debt that younger Americans owe after leaving college, combined with their relatively difficult time finding a career in their field and delayed ages of marriage and childbirth, as major factors contributing to the lower rates of home ownership among younger Americans. If Millenials continue to avoid purchasing homes in the coming years, it could pose ramifications for the U.S. economy, given that the housing market is often the main driver of the overall national economy.

Key Terms & Concepts

Appreciate: To gain or increase in value over time.

Depreciate: To decrease or lose value over time.

Federal Housing Administration: A division of the U.S. Department of Housing and Urban Development that offers loans for first-time homebuyers that require a 3.5 percent down payment rather than the standard 20 percent down payment.

Fixed Interest Rate: A type of interest rate on a mortgage or other loan that is permanently "locked in" for the duration of the loan; in other words, the interest rate is set at a predetermined percentage and can never increase or decrease.

Foreclosure: The repossession of a house or property from a financial lender as a result of the borrower defaulting on payments.

Guaranteed Loan: A type of loan in which a third party (usually a government agency, but perhaps a private co-signer) agrees to repay the lender if the recipient of the loan defaults.

Mortgage: A loan issued by a bank or other lending agency for the purpose of purchasing a home.

Redlining: A practice, now illegal, in which banks refuse to grant mortgages or other types of loans to residents living in certain low-income (often predominantly minority) neighborhoods that are deemed "high risk"

Servicemen’s Readjustment Act of 1944: A legislative act signed by President Franklin D. Roosevelt that provided federal benefits to military veterans, including low-interest home loans and free tuition to attend higher education; the act was in effect from World War II through 1956.

White Flight: Sociological term for the massive relocation of white Americans from urban residential communities to the suburbs during the 1940s and 1950s.

Bibliography

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Cramer, R., & Schreur, E. (2014). Millenials and homeownership. NewAmerica.org. Retrieved December 10, 2015 from https://www.newamerica.org/downloads/Millennials‗and‗Homeownership.pdf

Curry, S. (2013, August 29). 5 contributing factors in housing market crash. The Washington Post. Retrieved December 10, 2015 from https://www.washingtonpost.com/realestate/5-contributing-factors-in-housing-market-crash/2013/08/29/8532ddb6-0f60-11e3-85b6-d27422650fd5‗story.html

DeSilver, D. (2013, August 6). Around the world, governments promote home ownership. Pew Research Center. Retrieved December 10, 2015 from http://www.pewresearch.org/fact-tank/2013/08/06/around-the-world-governments-promote-home-ownership/

Dickerson, M. (2015, June 1). Homeownership is no longer the linchpin of the American dream. Quartz. Retrieved December 10, 2015 from http://qz.com/416474/homeownership-is-no-longer-the-lynchpin-of-the-american-dream/

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Kusisto, L. (2015, July 28). U.S. homeownership rate hits 48-year low. The Wall Street Journal. Retrieved December 10, 2015 from http://blogs.wsj.com/economics/2015/07/28/u-s-homeownership-rate-hits-48-year-low/

Maroto, M. (2015). The absorbing status of incarceration and its relationship with wealth accumulation. Journal of Quantitative Criminology, 31(2), 207–236. Retrieved January 3, 2016 from EBSCO Online Database SocINDEX Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=102621181&site=ehost-live

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Shelter, or burden? (2009, April 16). The Economist. Retrieved December 10, 2015 from http://www.economist.com/node/13491933

Shin, L. (2015, March 26). The racial wealth gap: Why a typical white household has 16 times the wealth of a black one. Forbes. Retrieved December 10, 2015 from http://www.forbes.com/sites/laurashin/2015/03/26/the-racial-wealth-gap-why-a-typical-white-household-has-16-times-the-wealth-of-a-black-one/

Tanneeru, M. (2009, January 29). How a "perfect storm" led to the economic crisis. CNN.com. Retrieved December 10, 2015 from http://www.cnn.com/2009/US/01/29/economic.crisis.explainer/index.html?iref=newssearch

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Suggested Reading

Bouie, J. (2015, May 13). A tax on blackness. Slate.com. Retrieved December 10, 2015 from http://www.slate.com/articles/news‗and‗politics/politics/2015/05/racism‗in‗real‗estate‗landlords‗redlining‗housing‗values‗and‗discrimination.html

Cole, L. (2015, December 30). Home ownership: Millenials could jump into the housing market in 2016. IBTimes.com. Retrieved December 31, 2015 from http://www.ibtimes.com/home-ownership-millennials-could-jump-housing-market-2016-2244360

Gallagher, L. (2014). The end of the suburbs: Where the American dream is moving. New York: Penguin.

Goetz, E. (2013). New Deal ruins: Race, economic justice, and public housing policy. Ithaca, NY: Cornell University Press.

Kolko, J. (2014, October 17). When you’re better off renting a home than buying one. Time. Retrieved December 10, 2015 from http://time.com/money/3513854/when-youre-better-off-renting-a-home-than-buying-one/

Tumen, S., & Zeydanli, T. (2014). Home Ownership and Job Satisfaction. Social Indicators Research, 117(1), 165-177. Retrieved January 3, 2016 from EBSCO Online Database SocINDEX Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=95299229&site=ehost-live