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The Wisdom to Unlearn a Not-valuable Lesson

May 25, 2015

Since prehistoric days, a key message passed on from one generation to the next has been buy your own ‘cave’ and, with a steady appreciation in value, you’ll never go wrong.

2015 25 US Housing Graphic

Guess what? U.S. ‘millennials’ – those born in 1980 or later − aren’t so sure about that conventional wisdom.

In the aftermath of the 2008-2009 Great Recession, they saw home prices nationwide in America drop by about one-third. If their own families didn’t experience a mortgage foreclosure, then someone emotionally close did – a neighbor, or a relative, or an older friend.

The reluctance of millennials to willingly and speedily engage in home ownership is one of the key factors holding back housing starts in the U.S. today; to the point where residential groundbreakings are only about two-thirds of what they might otherwise be, based on a growing population and an improving economy.

This is unfortunate because there is much to like about possessing your own home. I’ll have more to say on that subject in a moment.

Also, keep in mind that there were many aspects of the unprecedented downturn in the housing market during and after the recession that were unique and won’t happen again.

The collapse in home prices originated in the financial sector. Shaky sub-prime mortgages were bundled in packages along with more substantial and even ‘blue-chip’ notes. When the poorer-quality debt failed, the whole edifice crumbled.

Changes have occurred and measures have been put in place to ensure there will never be an ‘exact repeat’.

A whole slew of risk-prone independent investment bankers (e.g., Bear Stearns, Lehman Brothers, etc.) failed and was absorbed by other larger and sturdier establishments.  

Capitalization ratios for private sector commercial banks have been raised.

Fannie Mae and Freddie Mac have been strengthened with overt government backing, although passage of proposed legislation may eventually turn these enterprises private.

Poor-quality mortgage debt is no longer being offered and there are tighter restrictions for credit approvals.

This is not to say there will never again be a financial crisis.

Almost assuredly, at a hopefully far-distant future date, some ‘different variant’ will threaten the system. Therefore, ‘watchdogs’ must stay vigilant.

If forced to say where I might envision a fault line, I would name banking transactions over the Internet.

Lending digitally and especially across country borders, if not governed by strict international standards, would seem to offer too-ready opportunities for abuse.

There will always be existing and prospective homeowners who will be seduced by mortgage rates and/or other borrowing perks that, upon sober reflection, appear too good to be true – with justification.

All of the foregoing notwithstanding, young adults may have learned a false lesson; one they would be better off shedding and rethinking. They should not be dissuaded from home ownership too easily. The advantages are numerous.

Let me present some of the compelling arguments.  

Vacancy rates in rental properties are falling and rents are rising. As a renter, no portion of your monthly payment is going towards building equity. This may not seem so necessary in the short run, but long-term, it means plenty.   

Parents generally believe homeownership provides more stability for their children. Rental leases come up for re-signings with alarming frequency. Mortgage renewals occur at further-apart intervals.

By paying down mortgage principal at an accelerated rate, if and when possible, you gain more control over future accommodation costs than being dependent on what a landlord might decide to charge.

Real estate − along with stocks, bonds, commodities and currencies − is one of the five major asset classes. For most families, their primary shelter is the cornerstone of their accumulated wealth.

If necessary, even the burden of future borrowing can be alleviated through home ownership. A line of credit based on the solid collateral of a structure and property warrants a lower rate of interest.   

None of this even speaks to the sense of pride that can arise from the accomplishment of buying your own home.

Young adults – many of whom are saddled with large student-loan debt – have proven averse to new car purchases as well. American vehicle sales have been resilient nonetheless.

U.S. total car and truck sales are now at a level as high as ever. Two factors have played pivotal rolls. Cars don’t last as long as houses and need to be replaced. And credit approvals for vehicle loans haven’t been as stringent as for new home purchases.

North of the border, the issue of young people stepping back from home ownership has not been as prominent.

House prices in much of Canada have continued to keep on climbing, which presents a worry of another sort. Many analysts, writing for the business media at home and abroad, have warned about the danger of a housing bubble developing in Canada, which also implies an eventual collapse.

So far, a more conservative banking sector and an absence of questionable mortgage-lending practices have served the nation well.

As for motor vehicle sales in Canada, they’re soaring and establishing new all-time records.

There is one matter, though, that has come to the fore in the land of the maple leaf, more so than in the home of Uncle Sam.

While Americans have been busily spending the last several years paying down their debt, a hard-to-dispute ‘noble’ objective, Canadians have been endeavoring with equal and some would argue devilish zeal, to move in the opposite direction.

The Canadian household-debt to disposable-income ratio, with mortgages included in the front portion or numerator, has reached an all-time high of 166%.

Despite knowing this, the Bank of Canada’s most recent monetary action was to lower interest rates – a course of action that is a traditional stimulant for borrowing.

Too often, these days, the world as we know it can be characterized as topsy-turvy.



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