Why Falling Home Ownership Is a Good Thing

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Ever since the end of the boom years of the early 2000s, the housing market has struggled to hit bottom, seemingly plowing ever lower even after years of declines. As a result, millions of former homeowners have lost their homes, while millions more owe more on their mortgages than their current homes are worth. Many have bemoaned this trend as meaning the end of the American Dream of home ownership.

But when you take away the emotional response to the housing bust, the question remains: Are falling levels of home ownership really such a bad thing? For many, owning a home never made financial sense -- and avoiding the burden of having so much debt on your biggest asset can make your financial life a lot easier.

Falling from record highs
When the Census Bureau released its 2010 housing data last year, it revealed an astonishing fact: The percentage of Americans who owned their own homes fell by the largest proportion since the Great Depression. That made for good headlines at the time, as media sources proclaimed the death of the American Dream.

But a closer look at the numbers reveals a much different picture. During the Great Depression, many fewer people owned their homes -- around 45%, according to Census data. But by 2010, that rate was up to 65% -- meaning that tens of millions more American families became homeowners during that period. The rate even got closer to 70% before the housing crash happened.

The more important statistic
By themselves, these figures don't mean much. Whether someone owns a home or rents one from someone else doesn't matter in terms of overall demand -- as long as either a homeowner or an investor/landlord wants a property, the effect should be the same. What has really caused a problem, though, is the number of empty homes.

Again looking at Census data, the number of empty homes jumped by about 4.6 million over the past decade. When you consider that the total housing stock jumped by only 16 million homes, you can see that new supply far exceeded actual demand for real estate. Overbuilding was especially rampant in hot areas of the country, including the Desert Southwest and the Deep South.

Overbuilding worked out great for homebuilders at first, as it didn't cause any problem as long as there was enough demand for the homes. Between 2000 and 2006, Hovnanian (NYS: HOV) saw sales jump more than fivefold -- only to give back every bit of those gains by last year. KB Home (NYS: KBH) , which got in on the boom earlier, saw the same trend -- and its recent sales are only a third of its 2000 revenue. Standard Pacific (NYS: SPF) and other builders in particularly hard-hit regions were especially prone to big leaps followed by inevitable declines.

The new normal
Meanwhile, the aftermath has driven many speculators out of the market -- at least those who are seeking short-term rather than long-term profits. Even though that hurts demand in the short run, it arguably makes the market healthier in that it more accurately reflects the intrinsic demand for housing as a necessity rather than simply as an investment asset.

Of course, not everyone wins in that scenario. Hamstrung mortgage banks Citigroup (NYS: C) and Bank of America (NYS: BAC) would likely prefer more speculation in the market, since it would help those institutions get bank-owned assets and bad loans off their books more quickly.

But for people trying to decide whether to buy, the combination of low interest rates and cheap housing makes buying as attractive as it's likely ever going to be. So if your finances don't work out to allow you to buy now, they likely never will. That may sound brutal, but that knowledge should help those who can't afford a home to make arrangements that will work -- and hopefully benefit from the freedom that not being tied down to a house provides.

The dream that became a nightmare
So rather than a regretful loss of the American Dream, falling home ownership could actually be good both for individuals and for the economy as a whole. Instead of betting your entire financial life on a place to live, you can look at the housing bust as your wake-up call to consider other priorities first.

Even if you have a big mortgage weighing you down, you still need to save for long-term goals like retirement. You'll find several stocks that can help get you there in The Motley Fool's latest special report. It won't cost you a thing, but jump on your chance now before it's gone.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitterhere.

At the time this article was published Fool contributor Dan Caplinger was early buying his house, but he doesn't regret his decision. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy puts a roof over your head.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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