If prices go down but interest rates rise, it could mean an actual increase in monthly cost. Look at the chart. Prices would need to come down 10% to make up for a one percent increase in mortgage rates. You could decide to wait on your purchase based solely on price. However, if you think that interest rates could increase in the near future, it probably makes more sense to purchase now.
This is an interesting concept brought up often today because of the unemployment numbers. It seems some believe that a major reason people cannot find a job is because they are locked into living in a home they cannot sell.
Richard Florida is director of the Martin Prosperity Institute at the University of Toronto. In his essay for the Journal, Homeownership Is Overrated, he says:
Homeownership certainly contributed significantly to the golden era of American prosperity that began after World War II and continued into the 1990s, fueling demand for the cars and appliances that were rolling off assembly lines. But the foundation of our economy no longer lies in manufacturing, which created stable populations of workers committed to their jobs and communities for life. Today’s idea-driven economy requires a more mobile work force that can seize opportunities wherever and whenever they arise.
Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery.
Though there is truth to Mr. Florida’s statement, we must never allow homeownership to be looked at only through the prism of an economy. It means so much more than that.
We grow old relishing the fact that we have ‘roots’. We will drive by a home that we moved out of decades ago and reminisce about our mom and dad’s birthday parties or the games we played in the backyard with our neighborhood friends.
When was the last time you drove by an old office building you once worked in?
Homeownership means so much to families and to the communities those families helped build.
There is a pride of ownership that enhances both the home and the values of the properties surrounding it. The Federal Reserve Bank of New York just published a paper The Homeownership Gap. The paper explained:
Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.” All of these measures will be reflected, or “capitalized,” in stable or rising home prices.
The overall community is also positively impacted by the homeownership rate. William A. Fischel, in his book The Homeowner Hypothesis, points out:
I invented the portmanteau word “homevoters” (homeowners who are voters) to emphasize that residents who own their homes have a stake in the outcome of local politics that makes them especially attentive to the public policies of local governments… Everybody knows that homeowners care about the value of their major physical asset, their home. Most economists and nearly all home buyers know that the good things and bad things that local governments do tend to raise or lower the value of that asset. Studies of political economy find that homeowners are the dominant political faction in all but the largest local governments.
I realize there are times a family has to relocate. However, we lose too much if we become a nation of nomads who are constantly jumping from state-to-state forever in a quest for a better paying job. Going back to the Fed report:
A drop in the homeownership rate may create a large set of residents who are less invested in the long-run outlook for their homes and communities—an outcome that could lead to lower levels of home maintenance and civic participation, as well as more short-sighted decisions in local affairs.
Let’s not ever forget that this country was built on the belief that homeownership was a major piece of the American dream.
Thanks to Steve Harney and our friends at KCM Blog for this post.
