The New American Dream—Rent!
In the Christmas favorite “It’s a Wonderful Life”, George Bailey’s building and loan is the only thing stopping greedy Mr. Potter and his bank from turning Bedford Falls into a rent district. How appropriate a scenario for what’s happening today with home ownership?
Since 2004, home ownership in the United States has dropped by 2.8 million, from 69.2% to 66.5% according to Census figures. The Census also reports an increase of 3.4 million of rental properties just since 2010.
Unfortunately, for middle class America, the dream of owning your own home is becoming much less likely. Consider the following developments:
1. Foreclosures – Loan Processing Services Corp. statistics show that as the end of 2010:
a. 4.3 million homeowners were in foreclosure and seriously delinquent.
b. Half of the 3.5 million homeowners that have modified their homes are expected to default again.
c. An additional 1.3 million mortgages are 60 days or more delinquent.
d. That’s over 9 million additional homes that could go into foreclosure.
In other words, there are as many as 9 million homeowners that are likely to become renters in the next 3 years. Most of these previous homeowners are unlikely to qualify to buy another home for many years.
2. Tight Lending Standards – banks continue to make it far more difficult for renters to qualify to buy a new home.
3. The New High Unemployment Rate – Many experts project that the unemployment rate in the United States will hover around 8% or possibly even higher for years to come. This is likely to lead to even fewer new home purchases.
4. Higher Cost of Living – The higher price for essentials such as food and gas is taking a greater slice of the middle class income pie. This is leading to less discretionary money available for the average American to buy a home. Higher utilities and property taxes are also hurting the average American.
5. Stagnant Salaries & Declining Personal Net Worth – Sluggish growth of personal income and underemployment are expected to continue to have an adverse impact on home purchases. This problem will be exacerbated if consumer costs, interest rates and inflation continue to rise.
6. Government Policy Changes – The recent release of the Treasury’s White Paper on “Reforming America’s Housing Finance Market” has for the first time shown a shift in government policy away from homeownership to a greater focus on working toward a range of affordable rental options. The end result of this major policy shift is likely to be a stricter housing financing system with less credit available at higher rates and greater incentive for renters.
There you have it, a grim picture for the American Dream of homeownership. As banks cling to strict lending standards and continue to press the government to allow for higher mortgage interest rates that will lead to greater bank profits, we must ask ourselves “have these financial institutions become Mr. Potter’s bank of the new millennium?”