Homeownership can be bring you wealth or tie you down.
The general thinking goes that those that rent housing are throwing money away. The monthly payment simply goes to pay rent to the real owner of the home - the "landlord." The "lord of the land" term implies renters are housing slaves, so to speak, to the landlord. This is a centuries-old concept. While this concept is less true today with so many opting to rent as an easier and more convenient housing option in busy times, the old thinking prevails.
Along comes author and University of Missouri-Kansas City distinguished economics professor Michael Hudson, who turns the tables on the old way of thinking and suggests that homeownership today may also be a form of serfdom or slavery (Harper's Magazine, May 2006). This may prove true for many homeowners.
Our general perception (based on the "landlord" concept) is that homeowners are wealthy lords/ladies. Indeed, the American "dream" is homeownership and the idea of future wealth that equity and ownership implies. With rising housing prices across America, this becomes more difficult to achieve.
The Federal Reserve notes that mortgages have made up more than half of the total United States bank loans since 2003. This means that more and more people are buying (or refinancing) homes and acquiring a large debt in hopes of "getting ahead" and realizing a profit over time. During the 2005 housing boom, many buyers took out interest-only or no-money-down loans. It can take many years to acquire any equity this way.
So, what happens when the property purchased takes a nosedive in market value and you have only been paying on the interest and/or put no money down at sale closing? You'll have negative equity (owing more than the home is worth). This is no better than renting property, as you still have no equity. Hence, you actually own nothing In fact, this negative equity rears its ugly head again if you try to sell, as you'll have to come up with lots of extra cash to actually pay off your mortgage at closing leading to extreme indebtedness, as now you most likely won't have the necessary cash to acquire future housing. That's if you even had the funds to pay off the mortgage to close the sale. Can't afford to sell? Look ahead to foreclosure, a rising facet of the lending industry.
Homeownership is still a good investment if you choose the loan type and property wisely to avoid becoming too indebted. Save any way you can for a down payment and don't go beyond your means. Owning a home can either be a form of slavery to the bank or a way to be "lord/lady of your land."
(Published in the New Tucson Shopper, August 22, 2006, weekly real estate column)