America’s Homeownership Dream Shattered

Data-driven Vote of Non Confidence

Homeownership is a fundamental dream that most Americans aspire to. And despite myriad advances in investment schemes and products over the past few decades - Hedge Funds, Mutual Funds, ETFs, Swaps, Derivatives - over the long-term, a home is likely to be the best performing asset in any Americans’ retirement portfolio.

According to US Federal Reserve data, the median price of homes sold between Q1-1963 ($17,800) to Q1-2023 ($436,800), would have clocked an unbelievable value appreciation of 2,354% - that’s 5.48% annualized gain. Considering that many other “safe” investment products yield low-single-digit or even negative returns of late, homeownership is a better investment than most other alternatives.

Unfortunately, more recent data on homeownership rates (i.e., the percentage of homes occupied by their owners) casts a vote of no confidence on Americans’ dream of becoming homeowners. According to Fed data, since Q2-2004 (69.2%), homeownership rates have seen a steady decline, dropping to 62.9% in 2016, but anemically improving (66%) more recently. Comparatively, global data shows homeownership is booming elsewhere in the world:

• Kosovo 97.8%
• Romania 95.3%
• Serbia 89.4%
• Singapore 89.3%
• Spain 76%

The data indicates there’s a broader problem with America’s homeownership and home affordability. And there are underlying reasons why, unless prospective buyers act diligently, they may never get to own a home in their lifetime. The structural make-up of how homeownership financing works in the US, makes it even more challenging for homebuyers to claim ownership of their homes.

A Deck Stacked Against Prospective Homebuyers

The homeownership deck appears stacked against the average American homebuyer. Financial and economic conditions have steadily deteriorated, making an already difficult feat even harder to accomplish. The underlying macroeconomic factors, which push the dream of owning a house beyond the average buyer, include:

• Wage stagnation: Even as home owning affordability continued (and continues) rising, the pace of wage increases lagged. Each passing year, therefore, made the dream of homeownership less realistic to realize
• House price appreciation: Though rising home prices are a boon to owners; it is a bane to new entrants into the housing market. Especially for first-time buyers, coupled with wage stagnation, rising house prices puts the average home out of their reach   
• Student debt burden: Many aspiring homeowners carry legacy baggage – heavy student loan burdens – that puts them at a disadvantage when lenders review their mortgage applications. With a significant portion of their monthly disposable income going towards settling student loans, it gets harder for them to save for an eventual downpayment
• Homeownership affordability: There’s also a challenge with Americans saving culture. Many individuals and families live paycheck to paycheck, making it harder for them to continue owning and maintaining a home – even if they do manage to buy it

These factors, even when taken individually, create a huge barrier to homeownership. For instance, take wage stagnation as one contributing factor. While worker productivity increased by 64.6% between 1979 and 2021, compensation only increased by 17.3%. 

That disparity alone, of more than 47%, makes owning a house just a remote probability. But when all 4 of the above socio-economic factors converge, they stack together to make homeownership almost impossible to comprehend.

A High Bar…Raised Even Higher!

While these factors might traditionally have served as a challenge to owning a home, additional roadblocks, post the 2008 financial crisis, now make the homeownership dream almost insurmountable. The gravity of the 2007-2009 housing crash caused regulators to implement significant tightening of lending standards across the mortgage industry, including;

• More stringent income verification: Borrowers must now provide more details of their proof employment and income, including bank statements, tax returns, and paystubs
• Heightened property appraisal scrutiny: Inflated property valuation was the root cause of the 2008 financial crisis. Lenders now perform greater diligence, when evaluating loan applications, to ensure they only lend against more reasonable property valuation estimates  
• Steeper down payment requirements: Prior to the financial crash, some homeowners afforded their purchase with little or no down payment. For the most part, lenders now insist on upfront investment of between 10% and 20%
• Higher credit scores: To protect themselves against default risk, mortgage lenders now insist on only lending to individuals with enhanced credit scores
• Enhanced debt-to-income ratios: Lenders now subject prospective borrowers to heightened affordability checks. This means a higher debt-to-income ratio so borrowers can afford overall household debt, including the proposed mortgage, with less financial stress 

These stricter measures deliver additional protection to lenders. They are primarily meant to insulate loan and mortgage providers against the risk of borrower default. However, the unintended consequences of these additional risk mitigation actions are that they raise a previously high homeownership bar even higher.

A Light at the End of the Tunnel

As gloomy as the reality of buying a home might look, there are rays of sunshine that seep through. These come in the form of government assistance programs, such as the Down Payment Assistance (DPA) Programs and the Federal First-Time Home Buyer Programs. Private entities also support homebuyers by offering them a home mortgage loan, and other home financing products and services, at highly affordable terms. 

One such private company, in the fintech space, is SoFi, that offers affordable loans and mortgages with as little as 3% down payment. What started out as a Stanford business school student-managed fledgling company in 2011, is now an industry leader in the fintech, banking and mortgage lending space. It serves over 5.5-million members, has a track record of advancing $73 billion+ in loans, and has helped members repay $34-billion+ in debt.  

True, homeownership may seem like a nightmare. But doing your diligence, and reaching out to innovative companies in the private lending space, could help turn your nightmare into a dream come true!