to be or not to be a U.S. homeowner
Growing up in the U.S., I’ve been pushed to believe that one of the critical steps to building wealth is to become a homeowner. Why is home ownership glorified in the U.S., and does it actually make sense to buy a house solely for the purpose of growing your wealth?
The origins of single-family, suburban homes
Throughout the 1920s, Herbert Hoover helped create the foundation for the housing boom in the U.S. He believed that better housing would generate more family time, leisure, spirituality, and volunteerism. He created the Division of Construction and Housing, which would help standardize zoning, building codes, and construction materials and improve access to funding. They worked closely with a private organization named “Better Homes in America,” which preached:
“We need attractive, worthy, permanent homes that lighten the burden of housekeeping. We need homes in which home life can reach its finest levels, and in which can be reared happy children and upright citizens.”
The growing suburban neighborhoods built back then have stuck around since. In Robert Ellickson’s book “America’s Frozen Neighborhoods: The Abuse of Zoning,” he writes about how once a neighborhood is zoned for single-family detached homes, it almost always stays that way, partly because the houses are built to last and secondly because the local politics (NIMBYism, property value protection, etc.) prevent new mixed developments.
The expansion of homeownership
Despite Hoover’s efforts to expand home ownership, homeownership fell to 43.6 percent during the Depression. It was after World War II that homeownership skyrocketed.
Everything aligned to push people to the suburbs and buy their “dream homes.”
- National Mortgage Insurance Programs — The creation of the Federal Housing Administration (FHA) in 1934 played a significant role in this boom. The FHA provided mortgage insurance on loans made by FHA-approved lenders, which made home loans more accessible and affordable for a broader segment of the American population. By reducing the risk for lenders, these programs allowed for lower down payments and longer-term loans, making homeownership achievable for millions of Americans. Additionally, the Servicemen’s Readjustment Act of 1944, commonly known as the GI Bill, provided returning World War II veterans with affordable home loans, further spurring the homeownership rate.
- Banking — The banking industry also evolved to support the surge in homeownership. Innovations in mortgage financing, such as the development of the 30-year fixed-rate mortgage, provided more predictable and manageable payment plans for homeowners. The establishment of the Federal National Mortgage Association (Fannie Mae) in 1938, and later the Government National Mortgage Association (Ginnie Mae) in 1968, created secondary mortgage markets. These institutions bought mortgages from lenders, providing liquidity and enabling banks to offer more home loans.
- Highway Systems — The construction of the interstate highway system, authorized by the Federal-Aid Highway Act of 1956, facilitated suburban growth. These highways made it easier for people to live in suburban areas while commuting to jobs in urban centers. The increased mobility and accessibility contributed to the desirability of suburban living, further driving demand for single-family homes.
- Real Estate Developers — Real estate developers played a crucial role in the post-war housing boom. Developers like William Levitt, often referred to as the father of modern suburbia, revolutionized home building by applying mass production techniques to construction. Developments such as Levittown in New York exemplified the rapid construction of affordable, single-family homes that catered to the growing demand from returning veterans and their families. These large-scale developments were instrumental in making homeownership accessible to the average American family.
The U.S. housing stock more than doubled from 1940 to 1980, reflecting the massive expansion of suburban neighborhoods and the solidification of homeownership as a cornerstone of the American Dream. This period saw the transformation of the U.S. housing market, driven by government policies, economic growth, and changing social dynamics, cementing the cultural and economic significance of owning a home.
Does it make financial sense, today, to buy vs. rent?
In California, single family homes cost a median of $859,800, as of last year. The average home price in the U.S. was $412,000 as of 2023. Those are intimidating figure to think about as a 23 year old. Financial advice aside, I was curious what a homeowner’s decision would look like today.
Let’s consider this cozy 4B2B house in San Diego, CA.
Assuming a 20% down payment (140K) and a 720+ credit score, you’d be paying 4,529/mo for 30 years. Maintenance costs for a single family home are around 6,500 per year on average, or 540 per month. This results in a monthly payment of around 5K.
What if instead of paying 5K monthly you rented a townhome in this cute, walkable neighborhood? 4B, 2.5 bath and “luxury living.”
But hold on, right, because you could sell your home and make the investment worth it! Well if you’d like to sell your house afterwards, there’s a slew of costs:
- Real estate agent commissions (5–6%)
- Closing costs (1–3%)
- Home repairs and improvements (1–4%)
- Fixed costs: Staging and marketing, pre-sale inspection, seller concessions
Let’s assume that’s all around 7K.
In total over the 30 years, you’ve paid almost 2M. But let’s say home values continue skyrocketing. 30 years ago, the average U.S. home price was 157.5K, about 3/8 of what it is today. Optimistically, in 30 years, you can sell the house for 2M, about 3x the purchase price. (Capital gains tax would apply but pretty much all of it would be excluded due to primary residence exclusion.) The house has paid for itself!
But… what if you had invested that initial down payment of 140K instead? For 30 years, a 10% return results in 140 * (1 + 0.1)³⁰ = 2.45M. Post capital gains tax, net proceeds would be about 2.1M. You’d not only break even, but profit with about 160K, assuming you paid 1.8M in total to rent a place for 5K a month.
Of course, this is all dependent on market variability as well, but both the housing and stock markets are subject to variability.
Why don’t more people choose to rent vs. buy? Does everyone just prefer to own their home?
Well, the tax benefits (conveniently left out of the calculations) can make it worth it. For homeowners, up to 750K of total mortgage interest and 10K yearly of property taxes can be deducted from taxable income. Adding in mortgage insurance premium and home office deductions, this results in more than 1M in tax benefits. The U.S. government could also create deductibles for renters, but chooses not to in order to continue incentivizing homeownership.
Of course, homeownership is good in many other ways. Long-term homeowners are better citizens and neighbors than short-term renters are. The single family home, as Hoover initially imagined, can provide a safe, conducive environment for kids to grow. And homeownership is a great forcing function for saving and growing wealth.
However, I’m curious what an alternative paradigm looks like. 5-year minimums on rental periods so that renters are fully present in their communities. An alternative investment vehicle that comes with tax benefits and encourages families to store a bulk of their savings there for 30+ years.
Renting as a default could encourage living in more shared spaces, such as townhouses and multifamily homes, and help create more vibrant cities in the place of suburbia. Tenants would be more open to zoning law reform, allowing for more mixed-use developments. Moving away from single family homes would help alleviate our current housing shortages.
While homeownership remains a cornerstone of the American Dream, a shift towards supporting long-term renting and investment could offer a modern, inclusive approach to housing and community building. This would require significant policy changes and cultural shifts but could ultimately lead to a more balanced and resilient housing market.
