Housing Investment for the Long Haul

Home prices took a rough ride in the past decade. The past 10 years were  an anomaly fueled by easy credit availability. Those days are over – and for the better. Most Americans believe in hard work (and not easy credit) before being able to enjoy the fruits of their labor.

The chart below shows the long historical trend in median prices of a single-family home in the U.S.   A typical buyer purchased a $23,000 home back in 1970. The monthly mortgage payment on that home, assuming a 5 percent down payment, would have been $153 per month for 30 years. So a homeowner who did not do a cash-out refinance would  have paid off their mortgage by the year 2000. So imagine no further rent or mortgage payments. Currently in America there about 25 million homeowners who own their homes free-and-clear.

On top of no mortgage payments, the median price of a home in 2000 was $143,000. This is something a person could bequeath to their loved ones when the time arrives or even use for charity donations: the fruits of one’s lifetime labor being put to a good use.

Home prices took a rough ride in the past decade, it’s true. But let’s not forget about the very basic and long-term benefits of homeownership for those who are willing to stay well within their financial capacity.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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  1. Great article. As soon as buyers can understand what home purchase was always supposed to mean for Americans, the sooner we will hopefully see an uptick in demand. Check out this article on the buyer’s current window of opportunity: http://www.homeforsure.com/buyers-clock-move

  2. Thomas Lawler

    You are absolutely right; homeownership should be devoted to having homeowners gain equity over time. In the early 70’s, inflation and nominal income growth was high, so equity builds even with a 30-year amortizing mortgage, where principal repayments are very small in the first several years, seemed likely. In a lower inflation environment with slower nominal income growth expectations, however, such equity gains relying on inflation are less certain.

    But you are right that sustainable homeownership relies heavily on the homeowner having significant positive equity in her/her home. The “reasonable” down payment in a high inflation world is lower than in a low inflation world. Or for folks who don’t have the ability to put much down, the “reasonable” mortgage term isn’t a 30-year amortization schedule, but one that pays down principal faster (20 or 15 years, as was the norm in the 60’s).

    A house, of course, is a very illiquid asset with wide bid/offer spreads and high transactions costs. In a high inflation world, a low down payment with a mortgage where principal paydowns are very small might, I guess, make sense. But you are right in implying that it doesn’t make sense in a low inflation world.

    So…if a borrower wants a mortgage where principal paydowns are really low, I agree with you that large down payments are the right answer. And if a borrower can’t make a large down payment, that borrower needs to qualify with a mortgage where principal paydowns are siginficant over the first several years. Of course that borrower can’t “qualify” for as large a home in a “high inflation” environment than in the current world. That’s just common sense.
    Your focus on ensuring that a home buyer build equity, even in a world where home prices are not rising, is exactly right. And, as you know, close to 50% or realtors you recently surveyed expect home prices to decline over the next 12 months. So for potential home buyers who don’t have a lot to put down, it seems like your logic dictates a mortgage for them where principal payments are significant over the first few years — meaning, of course, “qualifying” for a shorter-term mortgage == e.g., a 20-year mortgage if a borrower only has a small 5% down payment.

    Let’s focus on buyers building equity without relying on inflation/home price gains! It is critical! You are so right!

  3. Modine

    The real issue is the majority of people do not live in a house for 30-40 years anymore. The population is way more tranist with average homeownership is 3-5 years before they move. Everytime you move and sell 6% to the realtor, add closing cost. People are not content to remain in one house for life anymore. Hell they won’t even stay in a one car for more than a year hardly.

  4. Thomas Lawler

    That is a good point. Sadly, so many homeowners don’t have ANY equity in their homes — and so many are in an negative equity position — that they feel they ‘can’t” move without taking a big hit either to their financial situaltion (bringing money to the closing table) or to their credit score (short sale, etc).

    As you note: Homes are a very illiquid asset with high bid/offer spreads and high transactions costs. Obviously, a “rational” lender would not want to lend to a buyer purchasinsg such an asset if the buyer either (1) had put little or nothing down; and/or (2) paid down hardly any principal over the first several years. What if the buyer has to or wants to move, and home prices are flat or down? They’ve not built a lick of equity, if they put little or nothing down they don’t have have any equity … How can they move, or how can they take that higher paying job in another area if after transactions costs they need to come up with a boatload of money at closing? Well, they can’t, and that really hurts the economy. Calls for providing low down payment loans to buyers with really long amortization schedules such as 30 year FRMs, as you note, just don’t make any sense. Yet strangely there are folks calling for MORE lending like that! It seems so weird.