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Homeownership loses its luster

Economic uncertainty, unstable prices and simple math have given Americans less incentive to buy.

February 19, 2011|By Alana Semuels, Los Angeles Times
  • Though they could well afford to buy, musician Vince Melamed and his wife, Meredith Carr, a freelance editor, are happy renting in Brentwood. Melamed says he doesn?t want ?the mortgage to stand in the way of a business decision.?
Though they could well afford to buy, musician Vince Melamed and his wife,… (Gary Friedman, Los Angeles…)

Meredith Carr and Vince Melamed of Brentwood are just the sort of couple real estate agents have always counted on to buy a home.

Melamed is a successful keyboardist and songwriter who wrote hits including Trisha Yearwood's "Walkaway Joe," and Carr is a freelance editor. They owned a home in Nashville, but when they moved to Los Angeles last year they decided they did not want to tie up their money in real estate, or be on the hook for home repairs and upkeep.

"I never want to let the mortgage stand in the way of a business decision," Melamed said. "I don't want to be in a position where I want to buy a piece of equipment but I can't because all my money is tied up in the house."

Carr and Melamed are part of what many economists see as a larger trend. Skittish after seeing home prices crater and eager to put money aside for a retirement that won't include pensions, working-age people are increasingly skeptical about buying a home.

Surveys tend to support the premise. Two-thirds of Americans still see a home purchase as a safe investment, but that's down from 83% in 2003, according to a study by Fannie Mae. Homeownership has fallen to 66.5% of the adult population, down from down 69.2% in 2004. A Harris Interactive polls says 70% of Americans aspire to homeownership, down from 77% a year ago.

The economic downturn and stricter mortgage standards are driving much of that decline, but economists say there's also a growing belief among many that they can live better by renting rather than straining their finances to buy a house.

Adding to that is a sense among many younger adults that they will need to move for their careers, making them hesitant to buy lest they be forced to sell at a loss.

"We're becoming more of a renting/sharing society," said David Sleeth-Keppler, a psychologist who tracks consumer sentiment for Strategic Business Insights. "People are staying less bogged down, in case something bad happens."

Real estate industry advocates contend that this is a passing phase, brought on by the plunge in home values from their peaks and the weak economic recovery.

People are still in a "financial fetal position," said Rich Simonin, owner of Riverside-based Westcoe Realtors. "People who are nervous about jobs and money are still fence-sitting."

Agents such as Simonin believe that attitudes will change as the economy improves, and that most Americans still want to own their home. Further, as more renters flood the market, rents will rise, eventually making homeownership more affordable than renting, according to Esmael Adibi of Chapman University.

The real estate website publishes a rent-vs.-buy formula showing that renting is the smarter choice right now in many cities, including Los Angeles, New York, Seattle and Kansas City.

There's been a long-running debate over home purchases as an investment proposition. Many personal finance experts and investment advisors contend renting often makes more sense, strictly from a financial point of view.

"Homeownership is not right for everyone, nor has it ever been right for everyone," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. "That's part of what got us into trouble — the idea that every American should own a home."

Residential real estate had a rate of return of about 6% a year between 1978 and 2008, according to a study by economists Jack Clark Francis and Roger G. Ibbotson. The broad Standard and Poor's 500 index of blue chip stocks, by comparison, had an annual return of 11%.

"Real estate does well in the long term, but it doesn't do as well as the stock market," said Ibbotson, a finance professor at Yale School of Management.

Real estate groups counter that owning a home essentially forces people to save, and the equity they build can be used to fund a wide range of expenses, from college tuition to retirement.

On the other hand, homeowners have to shell out thousands a year on upkeep, repairs and taxes. What's more, many believe home prices will take years to regain their peaks. In Southern California, median home values fell again in January, to $270,000, down from $505,000 in July 2007.

"When you do the math on it, it's not necessarily a great deal for everybody," conceded Steve Sachse of Nova Real Estate Services in Dana Point. His clients used to scrape together the money for a down payment and assume their house would appreciate enough in value that they'd become rich. Now, many of them are renting instead.

What the real estate industry fears most is that people won't buy again when the economy picks up, as some people assert.

When she was growing up, Lise Marken, 33, always presumed she would buy a house. Her great-grandfather bought property in Beverly Hills in the 1930s and her parents bought in the Westside in the 1980s.

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