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VOL. 126 | NO. 119 | Monday, June 20, 2011

Housing Gap

New perspectives on the American Dream of home ownership

By Sarah Baker

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The push for home ownership has been a fundamental element of the American Dream since the 1960s.

A For Sale by Owner sign sits in a curbside trash can outside a home at Kenwood Avenue and High Point Terrace in East Memphis. The housing market is in a state of flux because of a high percentage of rentals and sagging home values.

(Photo: Lance Murphey)

And because a home is typically a person’s most valuable asset, research indicates home ownership stabilizes neighborhoods while also contributing positively to the overall economy. Leading this promotional effort is the National Association of Realtors, which regularly links a healthy housing market to job creation.

Housing accounts for more than 15 percent of the Gross Domestic Product and generates more than 2.5 million private-sector jobs in an average year, according to NAR. The trade organization also attributes housing as the driving force that has led the country out of six of the last eight recessions.

But amid the worst housing slump since the Great Depression, the evidence to support the benefits of home ownership is crumbling.

Results from June 7’s S&P/Case-Schiller National Index show housing prices are now at 2002 levels, meaning the majority of those who bought a house in the last 10 years owe more than it’s actually worth.

Homeowners being under water on their mortgages often lead to defaults, which could then result in foreclosures. The cycle then causes a drastic drop in demand and a debilitating effect on prices, said Joe Spake, broker with Revid Realty.

“An obvious cause of the housing crisis was people being allowed to buy homes they couldn’t afford, with little or no money down, at record high prices,” Spake said. “The concept of the personal home as an investment is a marketing ploy. It was so much a part of our belief system that people continued to buy at top dollar even as the bubble was bursting, the type of behavior we see in the stock market.”

This is a separate issue from consumer confidence, he added, because the concept of homeowners having a place to call their own is quite different from the ideology behind purchasing a home as a financial investment for the future.

Carlton Sedberry, left, has been renting a home in the High Point Terrace area from owner Steve Bearman for two years, while it is for sale.

(Photo: Lance Murphey)

“The push of NAR is home ownership, for obvious reasons,” Spake said. “I thought before the bubble burst – and still think now – that the push should be for responsible home ownership.”

Based on estimates from the U.S. Census Bureau’s American Community Survey, local home ownership escalated from 60 percent in 2000 to 64 percent in 2004 before beginning a downward spiral. By 2009, home ownership had retreated back to 60 percent for Shelby County as a whole.

Perhaps even more telling is the city’s uptick in rentals. In 2000, 44.2 percent of the population rented, according to a recent USA Today article. In 2010, that number jumped to 48.1 percent.

What’s more, the Memphis figure far exceeds the national average of 34.9 percent and the state average of 30 percent. The high rental population might be appealing to out-of-town investors – who have been snapping up residential properties at a rapid pace as of late – but is extremely problematic for the city, Spake said.

“Less neighborhood pride leads to shabby looking neighborhoods, increased crime, and a negative impression for those who come to visit the city,” he said. “If the trend continues, property values will continue to fall.”

NAR’s research indicates that renters are five times more likely to move than homeowners, increasing the likelihood of blight and neighborhood decay. And with less wealth tied to a specific locality, renters have less incentive to protect the value of their property, which could potentially attract crime to the area.

For Mark Fogelman, president of Fogelman Management Group, it’s all about mobility. As the head of an apartment management firm, he understands one of the biggest selling points is the wiggle room of lease terms.

“Yes, renters move more often, but our customers want this flexibility,” he said. “Many others are now paying a steep price when they have no mobility because they are locked into a mortgage, which is possibly under water.”

Because Memphis’ median income levels are well below national levels, it’s likely that the home ownership rate will continue to decline, Fogelman said.

“I see the number (of renters) potentially increasing further, but most likely stabilizing,” he said. “Once rental rates reach a certain point, the consumer will once again move towards homebuying, but the economy and individual financial issues need to first thaw out. I do believe we will see the day in the coming years when buying a home is a more equal proposition from all angles, but we are a few years away.”

In the meantime, renters like Carlton Sedberry are taking advantage of the depressed housing market. He rents a house in the High Point Terrace neighborhood in East Memphis from Steve Bearman, agent with Crye-Leike Realtors Inc., who has the house listed for sale.

The two have an agreement that a minimum of 30 days notice is required in the event that the house sells. It’s a model that allows an alignment of interests in an otherwise challenging environment.

One of many homes for sale in the High Point Terrace area shows a price reduction.

(Photo: Lance Murphey)

“The homeowner can offset the continual expense of mortgage payments with a renter that will be there for a short time and to subsidize that outflow of money until the house sells,” Sedberry said. “Renters know that it could be for a short period of time, but they’re getting the tradeoff of a reduced rent and they still have the benefits of renting – they’re not paying taxes, they don’t have maintenance, they don’t have to come up with a big down payment to purchase a home, that is if they can qualify to purchase a home.”

The house is one of two Bearman and his business partner purchased about four years ago, “before things got really bad.” They then extensively renovated both properties, adding a significant amount of square footage.

“One we sold and the other is rented (by Sedberry) until we get a buyer,” Bearman said. “Personally, I think occupied is preferable if the tenant keeps the property in showable condition at all times.”

Bearman frequently gets calls asking to rent the house as opposed to buying it. But he’s optimistic the surge of renters will tighten the market, causing rates to rise and the mindset of potential homebuyers to change.

“Home prices are disgustingly low and interest rates are historically low as well,” he said. “It truly is a buyer’s market. We will recover, home values will increase again and interest rates will rise in the future.”

Exactly how far into the future that recovery will occur remains a mystery, said Phyllis Betts, director of the University of Memphis’ Center for Community Building & Neighborhood Action.

“We’re just sort of waiting for the national real estate market to recover and not taking into account that we’re a different market,” she said. “I don’t really see us on the right track because I don’t think we’ve had a discussion about what are the right questions, let alone the right answers.”

Both the national and local markets are looking for ways to rebuild in a post-subprime environment, Betts said. Much of the national dialogue, however, is currently centered on the “most overheated” real estate markets, of which Memphis has never been a part.

“You could argue that the really hot real estate markets will recover at a more realistic level in terms of real estate prices, but we don’t have that far to go up or down in terms of our real estate pricing,” Betts said. “What it really comes down to is we’ve got a low- to moderate-demographic in this area, and we’ve got a way excess inventory of homes.

“Right now, what we’re sort of in danger of is the proverbial throwing the baby out with the bath water. If we don’t find a way to support a certain amount of home ownership among what is now being looked at as a high-risk set of families in high-risk neighborhoods, then I think we have some real issues in terms of long-term home values and overall desirability.”

PROPERTY SALES 0 133 1,342
MORTGAGES 0 131 1,047