Monday, October 20, 2008

Has The American Dream Changed?

American dream house with white picket fenceCBS News did a piece this weekend titled, “Is Renting The New American Dream?” In the piece, they talked about the surge in the number of people looking to rent, and how the number of people buying homes is plummeting. The people they interviewed for the story talked about how they prefer to rent, especially in an economic climate like today's. So, has the American dream changed?

Personally I tend to agree with a comment on the story left by OneWorldUSA: “More people are renting because they have no downpayment (sic) and credit has been cut off to them. Renting is not the New American Dream, CBS, its (sic) the New American Reality for many.”

I couldn’t say it better myself. I think this story is missing the point that many Americans can’t buy even if they want to anymore. During the housing bubble, we saw record numbers of people buying homes, but that was in part because of the loose lending standards. It seemed like anyone with a pulse could buy a house, and of course we have seen that lending model fail. We are now looking at much stricter requirements for borrowers to get loans, and there just are not that many people who can qualify. To say that these people don’t want to own their own homes, though, might be a bit of a stretch.

The other piece to consider, of course, is that many people would like to own a home, but are choosing to wait on the sidelines, renting, until the market hits bottom. Buying a home is a huge deal, and a lot of people right now are nervous about making a bad investment. That being said, I think the American dream still involves people owning their own home. So while the American dream hasn’t necessarily changed, it most certainly is harder to achieve. Many people are choosing to postpone the dream for a while, just to be safe. Simply put, there is a new reality, not a new dream.


Anonymous said...

I'm not so sure. I live in a huge home, and pay property tax every single year on the part of the house I already own (and bought with after tax income), AND pay taxes on the part of the house I don't even own yet. Imagine getting taxed on something you don't even own! Everything I truly need is in my laptop.

Anonymous said...

"That being said, I think the American dream still involves people owning their own home."

WRONG: The American dream is being financially independent, not house-slave.

In my case I rent because it's the smartest financial decision. Owning a home worked for the previous generations financially (I'm gen X), no doubt about it. This is true specially for those that don't know how to save explicitly and can only achieve any savings paying principal on a mortgage. That of course doesn't mean that it works for the young with homes at these prices.

The financial reality for Generation X and Y is very different than what the previous ones faced. We will go through a long period of declining disposable income which will push home prices even lower. Property taxes to sustain unfunded local public pensions is going to be an issue too.

So if you are a smart investor you are better off renting unless you find a nice home for 2 times your annual income. I have substantial assets, far more than the average baby boomer's wealth (counting home equity). The downpayment is not the issue for me.

The issue is that housing is an intergenerational transfer. Old people count on home equity for their retirement while Gen X has to save for its entire future retirement. Why would I want to spend my future retirement on somebody else's while getting a depreciating asset that is going to keep on going down in value in exchange?

Until home prices are more than 2 times household income my take is "RENT is smarter". The American dream is being financially independent, not house-slave.

Eric Ames said...

I applaud you for your dream to be financially independent, but don't confuse your dream with the dreams of most Americans. Sure Americans might say that they dream of someday becoming financially independent, but most of them will go into debt at the drop of a hat to get what they want. This means that they dream of owning the things they want outweigh their dreams of financial independence.

Despite the crisis most Americans still want to own their own home. The reality is that many cannot afford their own home, but most would be willing to pay more to own their home than to rent a similar one.