As investors most of us tend to get caught up in the numbers. Is it a good deal? Can I rehab it for a profit? Is the rent sufficient enough to justify the price? Is there potential for appreciation? A savvy investor takes the emotion out of a deal. However for the average American making a major purchase, such as a home or car, is an extremely emotional process.
A recent report by Trulia ranks cities by their price to rent ratio to help people decide whether to buy or rent in a particular area. That’s all well and good and may be very useful in a lot of ways, but will people really use it to influence their buying decisions? My gut instinct is that they won’t. For the average family it probably comes down to how they feel about homeownership on an emotional level. Most people have been raised to believe that owning your own home is the American Dream. But do they still feel that way?
History of Homeownership
Since the 1950s approximately two-thirds of all homes have been owner-occupied. Homeownership became a reality for many Americans with the creation of the Federal Housing Administration (FHA) in 1934 and the introduction of the thirty-year mortgage. The post-war baby boom also led to a housing boom in this country and the goal of almost every family was to own a home of their own. Government tax policy also favored those who owned homes. Not only was it the biggest investment for most, in many cases it was the only investment.
In my former career as a financial planner I counseled many people who were “house rich and cash poor.” Their entire working life had been spent paying off the mortgage. For many their house was their nest egg. Many of these people would have had a miserable retirement if they hadn’t purchased and paid off a home.
Is owning a house still the American dream? For many it is not. Much like the child who burns his hand on a hot stove, many who have been burned by the housing bubble have lost interest in buying and prefer to rent. It is a normal emotional reaction. When people have a bad experience they will tend to avoid a repeat. If they lose money in the stock or commodity market they may shy away from returning. Real estate is no different. When an experienced real estate investor with a track record of making money loses money he or she will probably chalk it up to bad luck and move on to the next one. If an investor loses money on their first deal they may never return.
The false idea that real estate only goes up has been effectively debunked, but does that make homeownership a bad idea? Hardly. For many families owning a home is a great idea for a lot of reasons that go beyond the financial. There is the pride of ownership, being able to put down roots and give children stability. There is also the sense of community that is the very fabric of this country; do we really want to lose that?
A man always has two reasons for doing anything: a good reason and the real reason. – J.P. Morgan
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