Nationwide, home sales are up, mortgage rates are down and in many places, owning a home is as attractive as renting for the first time in years.
For generations, owning a home has been a key part of the lifestyle most Americans aspire to. But when the mortgage crisis exploded in 2007, it brought down the U.S. housing market — and the entire economy along with it.
The ensuing recession was an assault on the American dream of homeownership itself. The tidal wave of foreclosures, the crash in home prices and tighter lending standards have left some Americans unable or simply too nervous to buy a house.
In the wake of the housing crisis, a flurry of media coverage has trumpeted how Americans are rethinking homeownership. Pundits asked, "Is renting the new owning?" and a September 2010 Time magazine cover proclaimed, "Why owning a home may no longer make economic sense."
But has renting become "the future of home-dwelling" in America, as one cable news reporter posited?
As Mortgage Rates Fall ...
Monthly rates, in percent, for fixed 30-year mortgages
May 2012 figure is for the week of May 31.
In a word: no.
Five years after the market crash of 2007, the desire to own a home is actually very much alive and well. In a recent poll of likely voters by the Woodrow Wilson Center, 84 percent of respondents said homeownership today is just as important as or more important than it was five years ago. Ninety percent still think homeownership is part of the American dream.
'Living The Dream'
At a kitchen table in the Boston suburb of Sharon, Mass., 11-month-old Lilah Medeiros is eating mashed potatoes and making elephant sounds. Her parents, Jared and Emily Medeiros, are in their mid-30s. Both work in a museum, and both are first-time homebuyers.
Is It Cheaper To Rent Or Buy?
In 1989, the annual cost of owning an average home nationally was nearly double the cost of renting an average apartment, as shown in the index below. Now, the costs of owning and renting are nearly the same, according to the index compiled by MIT economics professor William Wheaton.
Actual costs vary by market. The payment/rent ratio is derived by multiplying the mortgage interest rate times the average house price, then dividing that by the average apartment rent. The index does not account for the "opportunity cost" of making a down payment on a home (as opposed to investing the money), and also assumes no house appreciation and no interest deduction.
"We got a nice front yard, backyard, side yard — two side yards," Jared laughs about the family's new digs.
Emily loves the family's new space. "[Jared] does some woodwork stuff. He can do his projects on the weekends, and I can do some gardening," she says.
"I do feel like we are living the dream. We've said it a couple times since we bought the place," she adds. "This is what you always picture — having the space to do this stuff — and now we do."
Around the country, young families like the Medeiroses are buying homes or condos in the city as well as the suburbs.
That desire to own a home, and one's own piece of land, has deep roots in the American psyche.
A Dream With Deep Roots
The term "American dream" became popular in the 1930s, says Bob Shiller, a housing economist at Yale. "But I associate it with the suburban movement that developed after World War II," he says.
"To me, homeownership at that time represented kind of a community spirit. We have neighbors, we like our neighbors, we're active in the community," Shiller says.
The American tradition of actively encouraging home- or farm ownership dates back even further, he says.
"That was the real American dream — [owning] your own farm. So we had the Homestead Act in the 1860s that made it possible for anyone with modest means to buy a farm," he says.
Still earlier, the French historian Alexis de Tocqueville noted the importance of homeownership in his book Democracy in America, published in the 1830s and based on his travels around the country.
"He noticed the independent streak of Americans and their desire to own their own farm and their own home," Shiller says. "He thought that that represented a kind of anti-feudal feeling — that each person in this country is an independent agent. There is no landlord or lord with his thumb on you."
That American dream arguably became pretty warped during the housing bubble. Buying a house meant making big money fast. There was a frantic rush to buy as prices rose, and McMansions sprang up as people used the equity in their homes to move into bigger houses than they needed.
"It was a different spirit," Shiller says of the boom times. "It was not the same American dream."
Buying More Attractive Than Renting
Jared and Emily Medeiros purchased their Sharon, Mass., home when they realized it had become more affordable to buy than in recent years.
Jared and Emily Medeiros purchased their Sharon, Mass., home when they realized it had become more affordable to buy than in recent years. Chris Arnold/NPR
Today, some might argue that people like Jared and Emily Medeiros are returning to something healthier. The homes on their street in Sharon are well-kept but modest. Many are ranch houses, spread out with nice, big backyards. There are no new McMansions in this neighborhood.
"Most of these ranches were all built in the '50s, so it's ... like a turnover right now," Jared says. "Either the people are moving to Florida or dying or selling their house. And a lot of couples our age with kids, first-time homebuyers, are buying up all the houses around here. You can totally see it. Just lots and lots of families."
The couple says they didn't buy expecting to get rich from rising home values. They simply did the math and decided that, by owning, they could get a lot for their money right now.
The couple paid around $250,000 for their home — less than they would have paid a few years ago for a nice house not in need of major repairs.
Home prices are down about 30 percent on average nationally. Interest rates are super low, while rents are rising.
"We're almost at a historic opportunity, in terms of the cost of owning relative to renting," says William Wheaton, an economist at MIT. "It's hard to think of a time in the last ... two or three decades when it's been as good to buy as right now."
Public Policy A Key Factor
Still, Wheaton says, many of the financial benefits of owning a house are a result of government policy. The government has a hand in making mortgages available and affordable, in part through the mortgage interest deduction for homeowners. Those kinds of incentives are a big reason that 65 percent of Americans own their homes.
The opposite is true in countries with different policies. Switzerland, for example, has the lowest homeownership rate in the developed world, Wheaton says.
That's not because the Swiss particularly love renting, he says. It's just that the economic incentives in that country push them toward it. The tax structure there favors renting: It's easy to get long-term rental leases, and loans are harder to get.
As a result, "only 35 percent of the population of Switzerland owns their home," Wheaton says. "And Switzerland is a very affluent little enclave."
The relationship between policies and behavior should be of interest to American policymakers. Over the next few years, Congress will be restructuring the government's role in the housing market. Those changes could have a significant impact on that key element of the American dream: owning one's home.