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4 reasons Americans are losing interest in owning a home

Rick Newman
Senior Columnist

FILE-This June 13, 2012, file photo, shows a house for sale in San Diego. Americans bought fewer new homes in June after sales jumped to a two-year high in May. The steep decline suggests a weaker job market and slower growth could make the housing recovery uneven. The Commerce Department said Wednesday, July 25, 2012 that sales of new homes fell 8.4 percent last month from May to a seasonally adjusted annual rate of 350,000. That's the biggest drop since February 2011. (AP Photo/Gregory Bull, File)

The housing recovery ought to be gathering steam, since the economy is improving, the unemployment rate is falling and banks are easing up on lending standards. Yet the opposite seems to be happening, with home price gains flattening out and sales of existing homes--the vast majority of all sales--dipping.

A particularly cold winter is probably responsible for part of the housing chill. But a variety of other factors suggests fewer Americans are interested in owning a home, even if they could muster the down payment and get approved for a mortgage. “We’re just losing our general sense of optimism about housing,” real-estate expert Robert Shiller, a professor at Yale University, said in a recent conference call. “It’s not fun anymore.”

The turbulent housing market of the past decade or so has left many experts guessing about whether housing will resume its central role in America’s economic life, or become less of a factor as budgets decline and priorities change. Home prices fell by about 35% on average from 2006 to 2012, according to the S&P/Case-Shiller index, and they’ve bounced back by about 25% since then. But the pace of growth is likely to slow in 2014. Many analysts expect modest price gains of 5% or so in 2014, but another downside surprise is distinctly possible. “There really is a worry we might see falling prices by 2015,” says Shiller.

Another bursting housing bubble characterized by huge price declines seems unlikely, because prices haven’t gotten nearly as out of whack as they did in 2006, when the last bust began. What seems more plausible is a long period of tepid demand for housing, as potential buyers increasingly decide to rent instead of buy and forego the hassle of owning a home. At the moment, economic forces are still discouraging potential buyers, since unemployment remains elevated, raises are scarce and consumer confidence is balky. But there are also signs of longer-term changes that suggest owning a home is simply less desirable than it once was. Here are 4 signs Americans are losing interest in home ownership:

Americans now view a home as a poor investment. The Case-Shiller-Thompson survey of home buyer expectations shows potential buyers, on average, expect a home to appreciate just 3% per year over the next decade. That’s about 1.5 percentage points lower than the average mortgage rate right now, which means money invested in a home would basically offer a negative return. In 2004, near the peak of the bubble, the expectation was a 12% annual gain for a decade. That was clearly outlandish, yet in a healthy market, expected gains on a home should at least be higher than the average mortgage rate. When it’s lower, rational people will spend their money on something else.

More young people may prefer renting. Many Americans in their 20s and early 30s found jobs tough to come by during the recession, while also dealing with onerous levels of student debt. Committing to a big purchase like a home may be the last thing they’re able or willing to do as the economy recovers. It remains to be seen whether young workers will generally sour on homeownership, or just end up owning homes later in life than their parents. For now, however, they seem to prefer renting in cities over growing roots in the suburbs or other places where homes tend to be more affordable for first-time buyers. (And some, regretfully, are still living with their parents.)

Institutional buyers may be largely responsible for the housing rebound. Sales of residential properties to investors spiked in 2012, to about 8% of total sales, according to research firm RealtyTrac. That may not sound like a large percentage of the total, but in a market characterized by tepid demand and limited supply, investor activity may have been enough to account for much of the 11% gain in home prices in 2013. If so, that may have created the false impression that healthy demand from ordinary buyers was pushing up prices. With interest rates and home prices both heading higher in 2014, housing may be less of a buyer’s market, scaring off investors hoping to buy at the bottom. That could reveal a market in which fundamental demand is weaker than expected.

Americans are spooked about the entire economic outlook. Consumer confidence has been up and down and remains far below where it was before the recession. The portion of Americans who feel the country is on the wrong track is more than 30 points higher than those who feel things are going right. Buying a home generally requires a sense of optimism about your own circumstances and, more broadly, the economy in general. Americans aren’t feeling it.

It’s entirely possible that, at some basic level, homeownership still retains the same allure it has for the past 50 years, and we’re still in the process of shaking off the psychological and financial sting of the housing bust. In the meantime, however, homes are getting less affordable, especially for first-timers. Tomorrow's homeowners could be waiting themselves out of the market.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.