It was 2004. Three years after Nine Eleven, four years past the dot-com bust. Nobody in Miami or Vegas or northern California could have imagined that in three dozen months the value of their homes would collapse by half. Interest rates were decent, the economy chugging along, credit plentiful, mortgages swelling and everybody wanted to live here. Wherever that was.
That year, at the height of house lust, the American home ownership rate touched a record high – 69.4%. Minimal down payments were the norm, as were teaser mortgage rates and jumbo loans. There was only one thing young couples wanted to do, and that was to grab a hunk of the national dream, no matter the size of debt that came with it.
The latest RBC survey of housing intentions found this:
“A majority of Canadians (84 per cent) believe that a house or condominium is a good investment. Just over half of Canadians think that now is the time to get into the housing market (52 per cent), while fewer Canadians believe house prices will be higher at this time next year (43 per cent, down from 47 per cent in 2012).”
Home ownership in Canada is also at a record high – just a hair under 70%. Almost half of all real estate purchases in the last five years were executed by first-timers, most with high-ratio mortgages and microscopic down payments.
I mention this for good reason. If we’re now on a similar path to that taken by the Yanks (we are), it’s worth knowing how things turned out down there. This week the US home ownership rate fell to a 15-year low. At 65% it’s back near Bill Clinton levels. Despite recent rebounds, prices are still 30% lower than they were in 2006. The median asking price for a house is $133,700, the lowest since 2005.
In total, about $6 trillion in wealth, mostly the net worth of middle class households, went poof. Millions of families now live in homes worth less than the mortgages placed upon them. And a cascading property market helped whack an economy that had become far too dependent upon it.
But you know all that. But did you realize what’s happening with the kids?
The home ownership rate among those under 35 is now just 36.8%, the lowest in twenty years. Yes, welcome to Generation Homeless. A slow economy’s forced an army of over-educated, under-employed twentysomethings back into their parent’s basements. That’s right – just like here.
But a key difference is that in Canada you need cough up only 5% of a property’s value to buy it. In most of the States these days, the minimum required is 20%. That’s created a massive gulf between the kids (one in three owns) and their Boomer parents (eight in 10 own).
Imagine if this were the case here. We’d not need mortgage insurance (it clicks in on sales where equity is less than 20%). Few people would buy homes they couldn’t actually afford. First-time buyers would no longer be the market’s driving force. Mortgage debt would decrease. And, yes, prices would fall. A lot. Maybe even revert to the mean, which is roughly 60% of where they sit today.
This should lead us to simple conclusions. Our housing market’s now being supported by stupid-cheap money and lending practices other countries have dumped. Policies like 5% down and state insurance protecting lenders routinely put 26-year-olds into unrepayable debt to buy assets at inflated prices. Many will never recover. We’ve allowed real estate to become a dangerous, unstable mainstay of the entire economy. And when 70% of families own homes, who do they sell to?
It took a financial crisis to wake the Americans up.
So glad I now rent.