A house can be an anchor around your neck
North Dakota is begging people to move there and fill vacant jobs. Could it be that many are pinned down by underwater mortgages and unsellable houses?
I don't own a home and don't think I ever will in the extremely expensive city in which I live. That's more a happenstance than a conscious decision.
But it seems I lucked out.
Owning a home has always made some people less mobile. Now, it's a veritable anchor keeping many owners stuck in place.
Some Americans thought they were going to rely on home equity to fund part of their retirement. Wrong. Others probably thought that by buying a home right out of college, rising home prices would let them sell and "upgrade" to a bigger and better home. Wrong again.
That makes it no surprise that more renters today say they're more likely to keep renting rather than buy, according to Fannie Mae.
I wouldn't blame you for being completely confused as to whether homeownership nowadays is a good thing or a bad thing. But here's how I’m thinking about it.
Boom times in the Peace Garden State
The recession did hit North Dakota. Its unemployment rate rose 0.8 percentage points between December 2007 and 2010.
But with North Dakota's 3.8% unemployment, you'd think residents in other states might be eyeing a move if their employment situations truly were desperate. North Dakota is going through an oil boom right now, which increases the need for petroleum engineers, drill operators, and all the retailers, doctors, and so on that would support them.
Granted the state is remote. It's cold. It likely doesn't have the cultural opportunities of a Miami or New York. When it comes down to it, though, of the 15 million or so unemployed Americans out there, there's got to be a bunch of families who decided to make the move, right? Post continues after video.
Over the last few years, though, the state has been literally begging people to come and fill jobs. The state has about 14,000 jobseekers, and the state-run employment website has 14,000 openings listed. You'd think that's a boon for the state, but the truth of the matter is, it's facing the kind of situation that makes businesses wary. If you can't hire people, you can't grow your business.
Where are all these movers to the Peace Garden State? (Seriously. That's its nickname.)
Well, there's a chance they're stuck in Florida, California, Nevada or any one of the dozens of states that experienced huge drops in home values. Not only can they not sell their homes, if they did, they might owe money on their mortgages.
So even if they did become unemployed and desperate, they might not be desperate enough, or have the ability to afford to forego the tens of thousands of dollars it'd cost to leave.
Interstate migration was already (.pdf file) on a downward slope before the recession started. I haven't seen any research (yet) that analyzes how much that downward slope has shifted due to the recession, if at all. In fact, it could be that foreclosures are balancing out any homeowners who are underwater and anchored.
But that doesn't mean it's not happening on an individual basis. The anchor-home phenomenon is something we'll be talking about as long as home prices continue to drop.
Do home prices have further to fall? Is that even worth thinking about?
Sometimes the bust makes us forget how strong the boom was. During the housing boom, home prices grew nearly 20% per year on average -- about six times faster than what you'd expect from inflation. That means, they could have even further to fall. To get back to that historical trend line, you'd need to see home prices fall another 20% this year.
Even if you put down a full 20% on a new home, that scenario would wipe out all your equity and possibly leave you underwater. It doesn't seem so crazy, given that there are still so many foreclosed homes for banks to work through.
Sure, it might not happen. But that's another thing keeping me from buying right now.
A broken maxim: Buy if you'll stay for five years
There's a commonly held belief that buying makes sense as long as you don't plan on moving for at least five years. That gives you time to build up equity -- the first several years of a mortgage have a disproportionate amount of the payment going to interest.
Thing is, nowadays, who can be sure that you're going to stick around for five years? Especially for young people, job changes can be rapid and frequent. It is said that the average Gen Y-er will hold seven jobs in his or her first 10 years of work.
It's hard to reconcile that with a home purchase. Let me rephrase the maxim: Buy a home only if you know you won't lose your job, get transferred, or find a better job elsewhere. And you have to say the same thing will be true of your spouse. Oh, and you probably shouldn't buy a home if you think you might get a divorce (sadly common).
That's a lot of ifs. And for me, it'll probably keep me from buying for a while.
Granted, I'm skipping all the benefits of a home purchase. If prices go up, it would make living cheaper. There's psychological benefit in having property. You can also remodel and repaint in ways that renters are restricted from doing. Does that outweigh the risk?
Anyway, looking forward to arguments for or against.
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