Are Falling Home Ownership Rates Actually Good for the Economy?

The primary downside to falling home ownership is a long-term problem if, as Jim Watkins points out, the situation does not correct itself through market forces. Talk to most baby boomers today who are nearing retirement, and their mortgage-free home is often the most significant asset they own. Even if they don't cash out the value of the home, having a paid-off mortgage greatly helps them maintain their standard of living during retirement, thanks to very low housing costs.

Even if rental costs are lower than ownership costs, in some markets, the differential is not substantial. Surprisingly, many renters do not sock away that extra cash into some type of retirement account. In 20 to 30 years, they won't have that valuable asset that their parents had, letting them continue living in their home without a mortgage payment or to help fund their retirement if needed.

Impact on the Economy

With people not buying homes, I think it puts more money into the economy. They don't need to save for a 20% down payment; they only need to save for one month's rent. And so do they stay frugal and save? No. They spend. Thus, to answer the question, I think it is good for the economy now. I am not sure about the long-term effects since people will be facing different challenges.

Economic Benefits of Strict Lending Practices

A very wise mentor of mine once told me that the only thing human beings are not making any more of is you should own some. This principle addresses the issue of rigid lending practices that led to sub-prime mortgages. Before the housing market crash, banks were issuing sub-prime mortgages, approving home loans that should not have been. For example, John Doe makes $65,000 a year but 40% of his monthly income goes to paying debts. When he walks into a bank to apply for a home loan, the bank approves him for a $250,000 loan with a 10% down payment. He is almost guaranteed to default on the loan at some point.

How does this affect the economy, or what does this have to do with the economy? Firstly, it is a good thing people are not flocking to buy because it means the banks are getting stricter on the guidelines to qualify for a mortgage. If fewer people qualify for the loans, fewer people will buy, and ownership rates will fall. This is because it is harder to get a loan, and the mentality after the crash means that people are being more cautious. It's kinda scary to imagine losing your home. To say it is good for the economy because the housing market and the stock market have always kinda followed each other is to point out that a positive swing shows an opposite effect of a negative swing.

Reduced Defaults and Improved Credit

Also note that the smaller number of home owners means fewer defaults. This then leads to lower bankruptcy rates and an overall improvement in the general credit of the population. With fewer people demanding homes and instead looking to rent out apartments or condos, you will see new buildings being built to meet this demand. This employs people and shows economic growth. In short, it's a good thing because it shows bank lending more responsibly. It creates a need to find other living accommodations, the odds of foreclosure go down, and people find other ways to invest. It stabilizes the market by creating just enough need to keep house prices fair. The demand for buying a house will always be there; it's just a matter of making sure that the home buyer can afford the home.

In conclusion, while there are challenges and downsides in falling home ownership rates, the economic benefits of stricter lending practices and reduced mortgage defaults can lead to a healthier and more stable housing market. This, in turn, positively influences other aspects of the economy, such as employment and overall credit health.