The end of home ownership

The End of An American Dream?

By Walter Russell Mead

The bursting of the housing bubble caused huge financial distress for people all over the United States, and the destruction continues. Millions of people still have negative equity, others have walked away from their homes, and millions of others are coming to terms with houses worth much less than they thought.

Over at the Wall Street Journal, Daniel Gross is asking an important question: is the age of home ownership in America coming to an end — and, if it is, is that good thing?

I’m inclined to agree with him on both counts; yes, home ownership is going to be less of a big deal for the rising generation than it was, say, for the Boomers, and yes, it’s a good thing all told.

Home ownership replaced the older ideal of owner occupied farm as the centerpiece of the American dream sometime in the late 19th/early 20th centuries. It may be that the future will look on this as a transitional process as Americans progressively wean themselves from the land.

Gross points out in his article that home ownership is problematic for many younger Americans. It isn’t so much about cost (though the tight credit standards currently prevailing as an overreaction to the excessively lax standards during the boom are a problem) as about flexibility. Young people move more; having to buy and sell a house every time they move exposes them to unnecessary costs and risks.
Gross doesn’t mention another trend which supports his core argument: that as young people delay marriage and divorce remains prevalent, the 30 year mortgage looks less attractive — perhaps particularly to young men. Renting an apartment makes a lot more sense if two people are just living together or aren’t sure their marriage will stick. It is much easier and cheaper to sort out a lease when a couple splits up than to manage the consequence of buying a house together.

In any case, Gross points out that the shifting preference among young people away from home ownership toward rental parallels a larger shift. As he writes:

Take cars. The Bureau of Labor Statistics says that private transportation—owning and running a car—is the second largest cost for a typical American household, accounting for 16% of expenditures. Factoring in finance costs, depreciation, repairs, insurance, taxes and gas, AAA calculates that an owner of a midsize sedan who drives 15,000 miles a year spends $8,588 a year on his car.

Enter auto-sharing firm Zipcar. Founded in 2000, it grew by focusing on cities and college campuses. It uses information technology to manage its fleet, and control access—people get cards that let them into garages where cars are kept and into the cars themselves. Users in New York pay a $60 annual fee and then $8.75 per hour on weekdays and $13.75 per hour on weekends—no extra charge for gas or insurance or miles. As the U.S. economy contracted, Zipcar went into hyper-growth: from 225,000 members in 2008 to 650,000 members and 9,500 cars in November 2011. Zipcar, which went public in 2011, has had success in the predictable big cities like Boston, New York and San Francisco, but its vehicles can also be found on 350 college campuses and in smaller cities like Providence, R.I., and Portland, Ore. Large rental agencies like Enterprise and Avis have responded by rolling out similar services.

The genius of America, and the secret of its success, does not lie in any particular social model. Our genius is the flexibility and the readiness to innovate and experiment that enables us to invent a new economy and a new social model when the old one breaks down.

It is much too soon to see more than the very rough outlines of the new society taking shape as the blue model breaks down — but the shift from capital intensive and debt heavy home and car ownership to a more flexible system could well be part of the change.

Certainly it now appears that without the vast machinery of subsidy and tax support that the mortgage-industrial complex now provides the owner occupied housing market, a much smaller percentage of American households would choose the home ownership option. Perhaps their instincts are right.