Social & Demographic Trends

Home Sweet Home. Still.

Five Years After the Bubble Burst

April 12, 2011

Overview

The five-year swoon in home prices has done little to shake the confidence of the American public in the investment value of homeownership. Fully eight-in-ten (81%) adults agree that buying a home is the best long-term investment a person can make, according a nationwide Pew Research Center survey of 2,142 adults conducted from March 15 to March 29, 2011.

There has been some falloff in the intensity of the public's faith. Today, 37% "strongly agree" while 44% "somewhat agree" that homeownership is the best investment a person can make. When this same question was asked two decades ago in a CBS News/New York Times survey, 49% "strongly agreed" and 35% "somewhat agreed."

Even so, confidence at any level these days is notable, given that the housing market is mired in the longest and deepest decline in modern American history. Home prices are down by 31% from their pre-recession peak in July 2006, according to the S&P/Case-Shiller Home Price Index.¹ After a pause last year, prices fell again in the first quarter of 2011.  

Homeowners are not blind to what has happened to home prices, nor are they expecting a speedy recovery. Among the 1,222 homeowners in the nationwide Pew Research Center telephone survey, about half (47%) say their home is worth less now than before the recession began, and 31% say its value has stayed the same. Just 17% say their home is worth more.

Of those who say their home has lost value, 86% say they expect it to take at least three years for values to recover to pre-recession levels; 42% say it will take at least six years; and 10% say it will take more than 10 years.

Still, fully 82% of homeowners who say their home is worth less now than before the recession began either strongly (37%) or somewhat (45%) agree that homeownership is the best long-term investment a person can make. Among homeowners whose home increased in value during the recession, this confidence is even more pronounced. Half (49%) strongly and 41% somewhat agree with this view.

Overall, homeowners are more positive than renters about the financial wisdom of owning a home; 41% of homeowners strongly agree that this is the best long-term investment a person can make, compared with just 31% of renters. (The survey sample included 57% of respondents who own a home and 30% who are renters; the remainder has other arrangements, such as living with family members.)

But renters are hardly immune to the allure of homeownership, even in the face of the five-year decline in prices. Asked if they rent out of choice or because they cannot afford to buy a home, just 24% say they rent out of choice. And when renters are asked if they would like to continue to rent or if they would prefer one day to buy a home, 81% say they would like to buy.

More evidence of the durability of Americans' belief in homeownership comes from a question in which respondents are asked to assess the importance of four long-term financial goals. Homeownership and "being able to live comfortably in retirement" are rated the highest; each is seen as being extremely or very important by 80% of respondents. Nearly as many (73%) say the same about being able to pay for their children's college education, and about half (53%) say the same about being able to leave an inheritance for their children. (These percentages do not include those who volunteered a "does not apply" response).

The Pew Research survey did find that nearly a quarter (23%) of all homeowners say that if they had it to do all over again, they would not buy their current home. But six-in-ten who express these pangs of "buyer's remorse" cite complaints about the home itself (43%) or the location (17%). Just 31% cite financial factors. Of these, about half (16%) say their home has either lost value or failed to rise in value; others point to changes in the economy or their own financial circumstances.

The Bubble and its Aftereffects

The collapse in home prices since 2006 came on the heels of a 10-year period during which they more than doubled, rising by an unprecedented 137% from 1996 to 2006.² However, much of this run-up was a classic market "bubble," fueled by excesses and fraud in the mortgage industry. When the bubble burst, financial markets melted down and the Great Recession (December 2007-June 2009) began.

During its dramatic ascent, the bubble generated big changes in consumer behavior. The home is the biggest asset for most Americans, and the run-up in home prices created what economists call a "wealth effect" that led to surges in consumer spending and borrowing that proved unsustainable. Once the bubble burst, those tendencies were curtailed.

Whatever other impacts it has had on the public and the economy, the bubble may partly explain the resilience of Americans' faith in homeownership as an investment. Despite the sharp market declines of the past five years, the typical homeowner who has owned a home since 2002 or before still has seen its value rise. Not surprisingly, the Pew Research survey finds that the longer people have owned their home, the more likely they are to believe in the investment value of homeownership.

The big rise in home prices in the late 1990s and early 2000s may also explain this survey finding: Even with the five-year swoon in home prices, two-thirds of the public say that homeownership is not affordable to most young adults in their 20s and 30s. (This judgment may also reflect the public's recognition of the high current levels of unemployment among young adults.)

Read the full report at pewsocialtrends.org.

<sub>1. Estimate based on the change in the quarterly, seasonally adjusted S&P/Case-Shiller national composite index of home prices.
2. S&P/Case-Shiller national composite index of home prices, first quarter 1996 to first quarter, 2006.</sub>