U.S. homeownership falls to the lowest levels in almost 20 years, blared the headlines. Lots of articles explained “Why Your Home is Not a Good Investment” and why Americans think owning a home is better for them than it is. It seems that America’s former love affair with real estate is over.
Blame the recency effect. People have a disconcerting tendency to give more weight to what just happened than long-term trends. This is why the monthly jobs report, a very rough estimate, has such an outsize impact on the markets. This same effect is what is driving people toward renting over buying.
A little context is needed.
Let me preface this by noting I was very bearish on U.S. residential real estate in the last decade. All the metrics — median income to median home price, cost of renting versus owning, residential real estate value relative to gross domestic product — showed an extremely overvalued market by two to three standard deviations. Before it was all over, economists Carmen Reinhart and Ken Rogoff argued that we were in a credit bubble and housing was due for a 35 percent crash. Continues here