A white picket fence. A well-manicured front lawn. A nice three-bedroom, two-bath colonial style home with a two-car garage on a cul-de-sac in a nice suburban neighborhood, surrounded by nice neighbors. Owning your own home: The American Dream. Buying and owning a home has always been the American Dream, but is the dream still a reality?
According to the U.S. Bureau of the Census, the percent of home-ownership jumped dramatically at the start of the baby boomer era in the 1950s, then remained fairly steady for about the next four decades or so, until it spiked during the housing bubble in the 2000s, and has since settled back down to those early post-war levels. After World War II, home-ownership jumped from a pre-war level of about 43 percent to approximately 63 percent and has since remained above that level. Recently though, home-ownership levels have declined to percentages not seen in nearly a half-century. At the end of the most recent quarter, home-ownership rates were at 63.7 percent. That’s just a smidgen above of the 48-year low of 63.4 percent set in the second quarter of 2015.
As you can see from the chart above, home ownership topped out above 69 percent around 2005 as lenders eased requirements and people were able to secure mortgages which they could not afford. Most of these mortgages were adjustable rate mortgages came with irresistible teaser rates. These home buyers – many of whom were first time home buyers – didn’t understand how their mortgages worked. When the teaser period ended and the loans adjusted, their mortgage payments were much higher; most of these people could no longer afford to make the newly adjusted payments on their homes. Many of those people were foreclosed upon as they could no longer afford their mortgage payments. After the housing crisis, home-ownership percentages have returned to pre-crash levels.
The home-ownership statistic itself, is a bit of a misnomer. While this statistic might sound like the percentage of people who own their own home, it’s actually the percentage of homes that are owner occupied. So if the U.S. Census indicates that home-ownership is at 65 percent, for instance, you might think this means that 65 percent of Americans own their own homes. It means that 65 percent of homes are occupied by the party that owns the house. The remaining 35 percent of homes are rental units. If the statistic was tracking the percent of people who own their own home, the figure would be much lower. Regardless, home ownership is still a goal which most people hope someday to achieve.
The down payment
If you want to buy a home, and many people still do, you need to come up with a down payment. Lenders want you to have “skin in the game.” They want you to move in to your new home with the goal of maintaining the property. If you have money invested, you are more likely going to treat your home better than if you were a renter or a home owner without any equity in the home.
Most lenders want borrowers to pony up 20 percent of the purchase price. A $300,000 purchase price would necessitate $60,000 for a down payment. A $500,000 purchase price would necessitate $100,000 for a down payment. A $1 million home would require at least $200,000 as a down payment, etc. That’s more money than most people have. If you want to buy a home, you will need to get serious about saving for a down payment. It might take a while to save up, but the investment in the long run, is usually worth the effort.
Saving on autopilot
If you want to save up money for a down payment to buy a home, or for any other reason for that matter, you should carve off a portion of your paycheck and save automatically. Most employers allow you to split up your direct deposit into multiple accounts. Instead of putting all of your money into your checking account, have a portion of your paycheck deposited into a separate savings or investing account. This will allow you to save and invest without any additional effort on your part.
Most people find it difficult putting money aside for long-term goals. There are far too many temptations and excuses inhibiting people from putting money aside each month for their future home purchase. You are better off having money taken from your paycheck automatically and living on what’s left over. If you and your spouse collectively earn $100,000, you could redirect, say 5 percent (or $5,000) of your wages into a separate bank account, specifically for your down payment.
As I mentioned above, if you are looking to buy a $300,000 house, you’ll need about $60,000 for a down payment. Saving “just” $5,000 each year means that it would take you 12 years to amass enough for the down payment. If you are serious about becoming a homeowner, you might want to stretch and save as much money as you can. Doubling your savings to $10,000 a year would halve the amount of time it would take to come up with the down payment.
There are other ways to save for your down payment. If you receive a refund when you file your taxes, put it in your down payment account. If you receive a bonus, put it in your down payment account. Rein in your spending. There are probably numerous expenses that you have which aren’t necessary. It’s all about choices. If you want to buy a home, you need to save for your down payment. The more money that you save, the sooner you will be able to buy a house and begin the American Dream of home-ownership.
Owning your own home will allow you to build equity. Assuming that you have a fixed-rate mortgage, you will be able to have fairly consistent monthly mortgage payments for the life of the loan. Then, most importantly, provided that you have the mortgage paid off by the time you retire, you will have a home of your own; a place to live without having to worry about marking your monthly mortgage payments. Those who rent or don’t have their mortgages paid off by the time they retire will have to figure out how to make their monthly rent/mortgage payments with only their savings and Social Security retirement payments.