The myth of real estate and economic mobility: Americans face lowest geographic mobility in over two generations. Is staying put the new American Dream?
Americans like to believe that they are movers and shakers and will follow the opportunity wherever it may be. The idea of selling your home and moving across the country for a great new job opportunity seems to be a common notion of how things happen. However the data shows us a very different reality. Americans are largely staying put. We can blame this on negative equity but this trend actually goes back to the 1980s. In fact, American mobility is at all-time record lows. What this means is people are staying put like our golden handcuffed baby boomers. I was thinking about this carefully and I think one major reason for this is the massive subsidies given to homebuyers creates incentives for staying put. Think of California with Prop 13 and the ability to write-off many housing items including interest when being a homeowner. The system is setup to keep people locked in. For a young person in a high cost of living area the best economic option may be to move and start in another state. However the facts point to a very different picture.
Is geographic mobility high in the United States?
From most people that I speak with the underlying prejudice is that yes, we as Americans have tremendous mobility. When I dig deeper most of these people have not moved beyond a couple of counties in their entire lives. Many have never even traveled outside of the US! At least this seems to be the case in Southern California. I suppose they would like to believe that they are the kind of person that is open to change and will follow their dreams no matter the cost but in reality, they are staying put. Inertia is a powerful force.
Some of these people complain that they missed the boat to buy but then don’t end up buying in the market today. If you believe home prices will go up as a fundamental principle, it doesn’t matter if you bought today or 10 years ago. In reality these people at their core are speculators. Yet that word carries a Wolf on Wall Street sort of connotation. They want to believe they are buying “to stay put” but they are no better than Wall Street investors trying to purchase the perfect hedge at the perfect time. If you are truly staying put, a 10 to 20 percent move up or down will not matter in 30 years. Then again, the average length of homeownership in the US is seven years so what does that tell you? Cognitive dissonance is strong in many people.
I think the relatively short time of homeownership plays more into the property ladder game. That is for example, you buy a cheap condo in Culver City, build some equity, and over a few years you move into your starter home in Pasadena. Another few years go by and then you buy your larger home in a better part of Pasadena. In other words, you are simply moving up within a confined region.
So let us look at Census data on mobility:
Americans are far less mobile than many believe. From the latest Census report:
“(Census) Relatively few of these movers traveled long distances,” said David Ihrke, a demographer with the Census Bureau’s Journey-to-Work and Migration Statistics Branch. “In fact, nearly two-thirds stayed in the same county.”
Even those who did leave their county didn’t move all that far away either: 40.2 percent of intercounty movers relocated less than 50 miles away. Only 24.7 percent moved 500 or more miles to their new location.
Renters were far more mobile than homeowners, as 24.9 percent moved between 2012 and 2013, compared with 5.1 percent of owners.”
Homeowners as you would expect are far less mobile than renters. But how good is this in a time when people are likely to have multiple jobs over their lifetime? Career employment is becoming more of a relic. For the young, this is part of the reason that the renter nation trend is continuing for lack of income to afford higher prices but also for mobility as many are starting their careers and need to keep their options open. Here in SoCal, you have people biting the monstrous commuting bullet and buying out in cheaper Riverside and San Bernardino counties and making the exodus each morning into Los Angeles or Orange counties.
There is also a bigger trend here and many are realizing that yes, the middle class is shrinking. Part of the middle class dream was owning a home but as the homeownership drops, maybe this is merely part of a much more larger macro trend. The dream is alive and well across the country but maybe not in your pocket market.
Americans also tend to believe that economic mobility is very easy to achieve. Let us look at some figures:
Ironically places like Japan, France, and Canada provide more economic mobility than here in the US. What is interesting is that since the Great Recession hit, many more once middle class households have fallen a rung lower. For example, imagine the baby boomer parents living in a high cost area of California now sending their kids to a private college with big debt. Are their kids going to have the ability to buy in a similar neighborhood? Do they have the same opportunities in terms of career? The amount of college debt in the United States today is staggering:
According to the latest Fed report, student debt outstanding is now at $1.08 trillion. This is far more burdensome for young prospective home buyers and as we recently noted, the first-time home buyer rate is at the lowest rate in a generation. It has been noted that college debt but also earning prospects have made it tougher for young Americans to purchase real estate especially when prices are rising with no subsequent growth in income.
What does this mean overall? I think this goes into our thesis of the handcuffed baby boomer that is going to go down in their World War II granite countertop sarcophagus. For those looking to stay in inflated areas, they will need to deal with a population that is unlikely to move as shown by the data. So you speculate and dive in, rent and adjust, or take the risk and move and leverage gains elsewhere in the country where real estate is modestly priced. The data shows most will simply stay put so the option becomes more of one between renting and buying. In California where only 1 out of 3 households can actually afford to buy based on their incomes, this is a very important question.