I am quickly coming to the conclusion that it is simply getting too damn hard to pursue the American Dream in the way in which we have all grown up to know it. What I am talking about is independent, free-standing home ownership. There are many reasons for this conclusion, but I will start with one and ramble from there. This Dream is predicated on what used to be one of the key differentiators about American life, and that was the access to long term mortgage financing to help home buyers realize their Dream with a modicum of accumulated savings and a reasonable estimate of future earning power to support an appropriately-sized monthly mortgage payment. In the post-WWII days, mortgage rates were in the low single digits (between 2-6%) and house prices were about $10,000 (more or less equivalent to $130,000 today based on inflation). While mortgage rates are now at 7.5%, not as high as the 16.6% hit in 1981, but well above the 2.65% they hit in 2021, the average price of a home has soared to a national average of about $500,000 with the most populous state, California, having an average house price that exceeds $900,000. That is 7X what it was 75 years ago, adjusted for inflation. That is a good starting point for the crumbling of that American Dream.
The average home in the U.S. cost $233/sf, whereas the average cost of a home in Europe is about double that. And yet, given that the U.S. average home is 2,300 sf and a European home averages 1,000 sf, the average cost of a home in the U.S. and Europe are not so very different. In the U.S., 66% of Americans own their own home and in Europe it is 69%. In China that rate is 90%, in Russia it’s 92% and even in Brazil it is 73%. India has a home ownership rate of 87%, though I suspect we are talking about very different kinds of homes all around. The point is, it is hardly a uniquely American phenomenon that people seek to and arrive at owning their own home. In fact, It is the most developed countries that have the lowest rates, with Japan at 61%, France at 63% and Germany at an amazingly low 47%. Vietnam, the country we slammed for over a decade in my youth has an ownership rate of 56%. Admittedly, Nigeria is among the lowest in the world with only about 25% home ownership, but otherwise the rich v. poor distinction doesn’t seem to correlate so well with home ownership.
I actually feel that we are likely to move backward in terms of home ownership penetration in this country unless something changes dramatically. We tried a number of federal policy initiative in the early 2000’s to boost home ownership by making financing more available through subprime lending. We all know where that left us. Thirty years ago almost nowhere in Latin America offered mortgages to encourage home ownership. Hyperinflation was the biggest deterrent. That has changed now with mortgages being made available by mostly government lending institutions in most countries of the world that I’ve mentioned above. Meanwhile, here in the U.S., we have gone from private lenders to an increasing share of the mortgage market being provided by government-backed lending (32%), but the Trump Administration seems set on eliminating Fannie Mae and Freddie Mac, so that number may well go down and the % of home ownership would likely decline commensurately.
Property taxes in the U.S. average only $1,800 per year, but that average house in California has taxes of about $9,000 and in Florida its closer to perhaps $6,000. I suspect that will likely be rising in the Trump Administration as tax cuts to income will have to be offset somewhere with increases as states and municipalities struggle with less federal subsidies than before. Homeowner’s insurance has become a very serious cost issue for many American households of late due to the dramatic rise in weather-related catastrophes like flooding, wildfires and other forms of storm damage. What was a $2,000 average cost item is now going up over $4,000 – $6,000, much to everyone’s chagrin.
States like California have tried to intercede in the homeowners’ insurance rout by offering risk pooling programs for homeowners being left in the lurch by their insurers. Most people cannot stomach a major casualty loss from losing their home, so insurance is pretty much a must-do, but with premiums rising dramatically around the country by well over 20% in the last few years, some people are wondering what to do. Florida and California have had particularly dramatic price increases due respectively to rising hurricane risk and rising wildfire risk. The hurricane risk has risen so much that Florida homeowners policy rates (when it is even available!) have gone up by as much as 300%, where wildfire risk has caused rates to go up 20-40% PER ANNUM, and shifting of large pools of homeowners (myself included) into the FAIR Plan since insurers like Chubb, Farmers, Allstate and State Farm have largely halted policy writing and begun to withdraw entirely from the state. I had picked Farmers since it is a California-based company, but to no avail since that has not stopped them from eschewing their own constituency and bucking their own state regulator.
The solution I and many others have chosen to retain access to coverage (something our mortgage providers insist on and can declare default against if not arranged) is to accept the FAIR Plan coverage with its high cost and then wrapping that fire protection with another policy to cover water damage and liability. I’ve begun doing what we probably all should have been doing all along but were too lazy to do in adjusting the deductibles and underlying coverage amounts to right-size my coverage based on my appetite for certain types of risk. This is something none of us have had to do much since the blanket of homeowners coverage used to be so fluffy and warm. The levers of deductible amounts and underlying coverage amounts are the key tools to bring the premium pricing into a bit better alignment with our budgets. I already took the fire risk deductible up to $25,000 figuring I was only really covering catastrophic and complete fire loss…and that in that circumstance I would not miss the $25,000 so much. That means that my calculus is now that if I get wildfired out of my house, I will take the check for the damage (who can really accurately assess such a thing whether through “replacement cost” or emotional loss?), sell the property for what I can, and let someone else develop their dream on this hilltop.
But now Farmers has given me a new challenge. For my water damage policy I now need to install a water leak detection and shutoff device. I have 45 days to comply and I understand this requirement is spreading like (pun intended…) wildfire across the industry. It seems the device cuts water leak damage by 96%, so a pretty rational industry decision. I was first quoted $4,000 to install one. Then I found a $2,000 offer and eventually settled on an $800 solution, only to find that my pipes are 1.5” pipes that need a bigger device and, you guessed it, I will likely be back up to $2,000 – $4,000.
This brings me back to my underlying theme. I don’t know whether I am any longer in the 1% club like I used to be, but I’m more financially able than the vast majority of retired Americans and even I find this a big, unexpected nick to my wallet. How do other American Dreamers handle all these financial burdens? My conclusion is that they can’t and soon won’t. We are all destined for more collective living solutions eventually anyway, so I guess maybe we had all better start revising our late-stage versions of the American Dream because the old one is simply getting too damn hard.