The costs of owning a home can substantially outweigh the benefits because of issues such minimal home equity retention and an owners desire to "flip" a home on the market quickly, researchers Wenli Li and Fang Yang said in their report American Dream or American Obsession? The Economic Benefits and Costs of Homeownership
, published Friday by the Federal Reserve Bank of Philadelphia
"One thing that is certain," the two analysts said, "is that homeownership is not for everyone, and thus, based on economic benefits, the case for trying to achieve a nation of homeowners needs to be rethought."
Many borrowers agree with them, especially ones that have never owned a home before. According to a Monthly Survey of Real Estate Market Conditions by Campbell Surveys
and Inside Mortgage Finance
, first-time homebuyer activity accounted for 39.1% last month, down from a peak of 48.2% in March to the lowest level seen in the past year.
First-time homebuyers are critical to the housing market because they soak up excess existing inventory, including distressed properties that continue to infiltrate the market. Campell said the decrease in first-time buyers will likely put more downward pressure on home prices in the coming months. Prices remained flat throughout July
Campbell attributed the falter from first-time homebuyers to the expiration of the tax-credit option a few months ago.
"The end of the tax credit has clearly had an effect,” stated Thomas Popik, research director for Campbell Surveys. “First-time homebuyer participation is continuing to drop. We expect a further decline in first-time homebuyer activity, perhaps reaching as low as 30-35% of the market by the fall months.”
But there's another element added to the mix. The Philadelphia Fed's report stated that loan applications for non-owner-occupied homes -- second homes, investment properties, etc. -- have increased over the past decade, reaching its peak in 2006 at 13% of all loan applications.
The report also said that non-owner-occupied houses rarely yield consumption value to the owner and cause many of the properties to foreclose.
"This makes the purchase of investment properties more of a short- to medium-term investment strategy, similar to buying stocks," said the report. "In other words, owners are more likely to be constrained or have more incentives to walk away from their investment properties in times of difficulty… even for second homes, foreclosure rates have also exceeded those for primary homes in recent months." (See chart below.)
Write to Christine Ricciardi