The Debt Incurring American Dream

in Finance/Finance & Business/Personal Finance/Politics by

Since 1931, when Historian James Truslow Adams first popularized the notion of the American Dream, American’s work toward obtaining a stable 9 to 5 job, home ownership with a green lawn, and a motor car. But in the long run, is chasing this dream what is best?

Although home-ownership has been shown to restrict geographic labor mobility and to effect job search behavior of unemployed, there is no evidence so far on how it affects their future re-employment outcomes. We use two waves of detailed German survey data of newly unemployed individuals to study the effect of home-ownership on the job search behavior of unemployed and their re-employment outcomes. We show that unemployed who own a home are less willing to move and also less likely to apply for jobs for which one would have to move. However, we do not find any evidence for compensations of their restricted mobility by more intensive (more search channels or applications) or different (more active or informal) search behavior. Furthermore, we find that home-ownership does not seem to harm the employment prospects of the unemployed. Although the re-employment probability in the short-run is slightly lower, we find that after one year home-owning unemployed have found better re-employment jobs, in terms of wages and job satisfaction, than their renting counterparts. (1)

Thus, it may be concluded that home ownership, in this aspect, neither benefits nor hinders the search for work, despite its upfront appearance. However, this is a short-term outcome, for in the long-term, it may be concluded that home ownership is far from beneficial.

History

Historically, to own property was to be an elite member of society. Now, this isn’t the case, as America provided the opportunity of “democracy” in which everyone could be a member of this elite class of landowners, thus shifting the defining fabric of what it meant to be elite.

Times have long since changed. Today’s ruling class is not defined by property. The definition lies in stocks and asset ownership. Yet, despite this, the American dream remains to own land.

Over the past 50 years, the average annual rate of change in the median housing price has been 5.4 percent (2), but this figure cannot be used. This is because during the same time period, the median size has increased 63.3 percent (3). Weighing for the percent change in size per year, it may be concluded that the true price per square foot has increased about 3.82 percent (annual price increase minus the average increase in size). Inflation over the same period averages 4.11 percent per year from 1970 to 2016 (4).

Using this line of reasoning, people who buy houses and hold them as their “life’s biggest investment” are in fact losing money due to inflation.

Loans

Furthermore, in order to buy the house, most people have to get a mortgage, most often settling for a 30 year fixed rate. Using the assumption of a 30 year mortgage and better than perfect credit, one could get a mortgage for about 3 percent today. This is one of the lowest rates in American history. The median home price is about 230,000 dollars today (5 & 6). Assuming that one makes a 20% down payment or $46,000 towards the purchase of a house, (this is a generous assumption considering 83% of Americans don’t have $1000 savings (7)), that they make the minimum monthly payment every month, after 30 years, the total paid on interest would amount to $95,000. At that point, one would have paid more money for their house than their house is worth, especially once the house has gone through 30 years of wear and tear.

If you invested $46,000 in the markets (the financial tools of the elite) and adjusted to inflation, there would be 5.38% average annual return, over 30 years totalling $221,566. But, this isn’t possible for the average American, so instead, we buy houses, and lose the true American Dream to those at the top.

Works Cited:

  1. http://ftp.iza.org/dp8972.pdf
  2. http://www.census.gov/const/uspriceann.pdf
  3. http://www.aei.org/publication/todays-new-homes-are-1000-square-feet-larger-than-in-1973-and-the-living-space-per-person-has-doubled-over-last-40-years/
  4. https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913
  5. https://ycharts.com/indicators/sales_price_of_existing_homes
  6. http://www.realtytrac.com/news/home-prices-and-sales/june-and-q2-2016-home-sales-report/
    1. I decided to include 2 sources, since there seemed to be a little bit of conflicting data.
  7. http://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

Leave a Reply

Your email address will not be published.

*