By the alooola® Team
In 1987 the New York Times ran a story titled, “Why Owning a Home Is the American Dream.” Three and a half decades later, it’s hard not to feel as if millennials are waking up to the harsh reality that owning a home is just that…a dream.
During the global pandemic, 33% of individuals between the ages of 18-34 were living back at home with their begrudgingly supportive parents. As the quarantine environment finally began to subside, this generation of young adults began to emerge as prospective home buyers. (7) Yet, as media outlets have highlighted recently, many people only acquired more headaches and frustration rather than property.
So, who is responsible for the woes of this current real estate market? Some young would-be home buyers like to point an angry finger at their parent’s generation, the “boomers,” because let's be real, they are an easy target. After all, back in 1987 when the NYTimes article first ran and many baby boomers were buying homes, the median house price in America was just $97,900(1). Today, it is more than 4x that cost! But the real culprit is a combination of well-meaning politicians and profit-driven corporations.
During the 1980s, 1990s, and early 2000s, we, as a country, built over 40,000 homes per 1 million people (about the population of Delaware). Then, thanks to the speculative profit-seeking practices of some firms on Wall Street, the Great Financial crisis hit in 2008 and the real estate market plummeted down with Lehman Brothers. When the dust settled, home builders had either gone bankrupt or were unwilling to keep building as quickly as they had been prior to the crisis. Our production of single-family homes plummeted to less than 25,000 homes per 1 million people for the last decade…far below the required supply of homes needed for our growing population. (3)
This severe undersupply of homes would have been an immediately apparent problem had it not been for the fact that the next generation of home buyers, the millennials, were too financially constrained with more than $1.5 trillion (about $4,600 per person in the US) in student loans to even think about pursuing any of the major financial decisions that previous generations had jumped into at their age, whether that was marriage, having children or buying a home.(4)
That all changed, however, during the pandemic when Uncle Sam took a few crucial actions that made millennials feel more financially confident about finally taking the big leap towards the traditional American dream of homeownership. First, our politicians began to pass laws to provide over $9 trillion (about $28,000 per person in the US) in financial support to individuals and corporations.(5) For context, that was far larger than the amount of money our government spent to support the country when we were even in the Great Depression. The cumulative effect was that Americans found that they had a record level of savings sitting in their bank accounts. Next, our financial leaders decided to bring interest rates down to near 0%. Consequently, a monthly payment for a 30-year mortgage (with 20% down payment) cost $215 less per month than it did just two years earlier.
The effect was large and immediate as first-time buyers came out in droves. The problem, however, was that they weren’t alone. Unlike in the past, first-time home buyers found that they were often bidding against and losing to deep-pocketed institutions like pension funds that viewed real estate as an attractive asset to diversify their multi-billion-dollar portfolios. In fact, this movement was so large that close to 20% of all real estate buyers at the beginning of 2022 were institutions. (6) Unfortunately, that meant that many of these first-time home buyers that were so excited to make the big financial leap a few months prior had to head back to their rented apartments feeling as if they haven’t made any progress in achieving the next step in their idea of traditional adulthood.
Here at alooola®, a financial mobile app built for young professionals, we hear from many of our members that they feel as though they are continually falling behind their peers even though they are working hard every day. And this feeling seems to be exacerbated in today’s social–media-focused world as individuals scroll through their social media feeds only to see one of their lucky and seemingly higher-paid friends posting a picture outside of their newly purchased home.
If this all seems like this is an oversimplification of a complex process that has unfolded over the past half-century, you’re probably right, but if it also seems like these boom-and-bust cycles in real estate seem self-imposed like clockwork by politicians and their campaign donors on Wall Street, you’re probably right again.
So where does this leave us? Besides depressed and maybe slightly more motivated to vote in the next election, not a whole lot of other places. That is until you realize that your boomer parents weren’t as smart as they let on, because if you take the emotional side out of the American Dream of buying a home you realize that they never should have bought that house in the first place, and neither should you. Let us explain:
If instead of buying a home in 1987 for the median price of $97,900, your parents had taken that money and invested it in the stock market, they would have realized an average annual total return of 12.58% from 1987 through the end of 2021.(2) That means that they would have entered this year with just over $4 million dollars compared to the comparatively measly $428K they have in their home value right now.
Sure, you could point out that it's unlikely they paid for their first home in all cash. So how does the math change if they only had enough money to buy their first home with a 20% down payment? Well that means they would be choosing between making their first home down payment or investing around $20K (i.e., around 20% of $97,900). Once again, however, the investment strategy would have paid off handsomely. At the start of this year, they would have had over $850K in their investment portfolio, or put differently, 2x the value of their home.
Of course, you could make this math analysis a lot more complicated by adding in the effect of taxes, home improvements, rental expense, etc. but it wouldn’t change the main takeaway; namely, that the stock market, despite providing superior returns over time, has been lost in the psyche of most American’s who have been sold a dream that is becoming increasingly difficult and financially unattractive.
This doesn't necessarily mean that owning a home is old-fashioned or out-of-style. It may make a lot of sense to buy a property to establish a stable home to raise a family or to diversify your assets. The problem is that today people are often blindly pursuing homeownership at the expense of investing in the stock market and potentially building their long-term wealth by an even larger amount. Time will tell if this next generation ultimately accepts this rationale and reshapes their definition of what the American Dream is or if they will continue pursuing homeownership at the risk of it becoming an American nightmare.
Using total return of S&P500 https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
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