A brief history of U.S. homeownership

During the month of May at Get Rich Slowly, we're going to turn our attention to home and garden topics. To start, I want to take a brief look at the history of the U.S. housing market. Some folks might find this dry. I think it's fascinating.

Private land ownership is baked into the U.S. culture and Constitution. It's part of the material plenty we expect from the American Dream. For most Americans, homeownership implies success and freedom and wealth.

But for a long time, homeownership was the exception rather than the rule. Only farmers were likely to own land and a house during the country's early days. With the coming of the Industrial Revolution, homeownership became more common for urban dwellers. Still, less than half of all Americans owned their homes until the late 1940s.

Here's how U.S. homeownership rates of changed over the past 128 years according to the U.S. Census Bureau and the Federal Reserve Bank of St. Louis:

U.S. Homeownership Rates

The current U.S. homeownership rate as of January 2018 is 64.2%.

I'm sure you could write a doctoral thesis on the reasons for the growth of homeownership over time. I'm not going to do that. After several hours of research into the history of mortgages and the real-estate industry, I feel like we can summarize everything in a few paragraphs. This article — which is information-only — will serve as background for future Get Rich Slowly discussions about homeownership.

In the Beginning

During the 1800s, most folks had no way to own a house. They didn't have the lump sum required to make the purchase, and banks wouldn't lend money for average people to buy homes. Mortgages didn't become common until the U.S. banking system was stabilized following the National Bank Acts of the 1860s.

After this reform, banks began to experiment with lending money for homes, and by the 1890s, mortgages were popular across the U.S — although not precisely as we know them today.

A typical mortgage in the early 1900s might have a term of five years and require a 50% down payment. Plus, they were usually structured with interest-only monthly payments and a balloon payment for the entire principal at the end of the term. Borrowers could (and did) renegotiate their loans every year.

Compare this to modern mortgages, which usually have 30-year terms and require a down payment of only five to twenty percent. (I bought my first home in 1993 with a down payment of less than one percent!)

Mortgages: Now and Then

These early mortgages worked fine until the Great Depression. When that crisis hit, banks had no money to lend — and the average borrower had no cash either. As a result, potential homeowners couldn't afford to buy, and many existing homeowners defaulted. (At one point during the 1930s, nearly 10% of all homes were in foreclosure!)

Note: This article originally appeared at Money Boss in April 2016. I've updated text-based stats through 2018, but graphics-based data is two years old. However, nothing material has changed in the past 24 months.

Bubbles and Booms

To stabilize the housing market, the U.S. government created the Home Owners' Loan Corporation in 1933, the Federal Housing Administration in 1934, and the Federal National Mortgage Association (now Fannie Mae) in 1938. These institutions helped to arrest the housing crash and, eventually, spur homeownership to new heights.

But it was the G.I. Bill of 1944, which provided subsidized mortgages for World War II veterans, that changed the face of the housing industry and the American economy. From encyclopedia.com:

The GI Bill's mortgage subsidies led to an escalated demand for housing and the development of suburbs. One-fifth of all single-family homes built in the 20 years following World War II were financed with help from the GI Bill's loan guarantee program, symbolizing the emergence of a new middle class.

As homebuying became more common (and more complicated), real-estate brokers helped sellers find buyers for their homes. The National Association of Real Estate Boards adopted the term Realtor in 1916. As the housing market boomed during the 1940s and 1950s, so did the real-estate profession.

By 1950, for the first time in American history, more than half of all Americans owned their homes. As demand for housing increased, so did prices.

For 25 years, Yale economics professor Robert Shiller has tracked U.S. home prices. He monitors current prices, yes, but he's also researched historical prices. He's gathered all of this info into a spreadsheet, which he updates regularly and makes freely available on his website.

This graph of Shiller's data (through January 2016) shows how housing prices have changed over time:

The Shiller Index of Home Prices

Shiller's index is inflation-adjusted and based on sale prices of existing homes (not new construction). It uses 1890 as an arbitrary benchmark, which is assigned a value of 100. (To me, 110 looks like baseline normal. Maybe 1890 was a down year?)

As you can see, home prices bounced around until the mid 1910s, at which point they dropped sharply. This decline was due largely to new mass-production techniques, which lowered the cost of building a home. (For thirty years, you could order your home from Sears!) Prices didn't recover until the conclusion of World War II and the coming of the G.I. Bill. From the 1950s until the mid-1990s, home prices hovered around 110 on the Shiller scale.

For the past twenty years, the U.S. housing market has been a wild ride. We experienced an enormous bubble (and its aftermath) during the late 2000s. It looks very much like we're at the front end of another bubble today. As of December 2017, home prices were at about 170 on the Shiller scale.

What caused the housing bubble during the last decade? And what's feeding the current buying frenzy? That's a great question, and it's open to debate. Some folks blame loose lending standards. Some blame a lack of government oversight. Some blame real-estate speculators. Some blame the American propensity for consumption. Some blame cheerleading from the real-estate industry. Me? I think it's a little of everything.

Sears kit home: The Magnolia

Bigger Everything!

Naturally, increased home prices and increased ownership rates brought increased mortgages. During the past fifty years, long-term mortgages with large balances became more common until now they're the standard.

Between 1949 and the turn of the twenty-first century, mortgage debt relative to total income of the average household rose from 20% to 73%, and from 15% to 41% relative to total household assets.

One reason mortgage sizes have increased is that housing sizes have increased.

According to the U.S. Census Bureau, the median size for a new home built in 1973 was 1525 square feet. By 2016, that number had jumped to 2422 square feet. In those forty years, kitchen sizes have doubled, ceilings have risen more than a foot, and bedrooms have grown by more than 50 square feet.

But home sizes are ballooning even as households are shrinking! The average household had 2.9 people in 1973. In 2016, the average household had 2.5 people. Let's run the numbers: Forty years ago, we had 526 square feet of living space per person; today, we have 969 square feet of living space per person.

To me, this seems crazy. Why do we need such huge houses? What's the point? And do homeowners truly consider the costs when they choose to buy big? A larger home doesn't just carry a larger purchase price. It costs more to maintain. It costs more to light, to heat, and to furnish. For too many people, big homes are the destroyer of dreams. (I'm not joking. I truly believe this.)

Full disclosure: In the past, I've been guilty of pursuing home-size inflation myself, although I eventually came to see the error of my ways. My first house (purchased in 1993) had 1383 square feet. My second house (purchased in 2004) had 1814 square feet. That was “peak bigness” for me. The condo I sold last year had 1547 square feet. And the house we moved into last July has 1235 square feet. I think about 1000 square feet is ideal, but Kim likes having the extra room.

I'm not saying you should live in a shack. Nor am I suggesting everyone should own a tiny home. But I believe it's important to be logical when it comes to housing. Remember that size comes with a price. If you need the space, buy it. If you don't, you're better off saving your money for something else.

The Bottom Line

Housing is by far the largest expense in the typical budget. According to the U.S. government's 2016 Consumer Expenditure Survey, the average American family spends $1573.83 on housing and related expenses every month. That's more than they spend on food, clothing, healthcare, and entertainment combined!

Here at Get Rich Slowly, I'm adamant that one of the best ways — if not the best way — to improve your cash flow is by cutting your costs on housing.

Remember, your goal is to manage your financial life as if you were managing a business. If you were looking to balance the budget at a company you owned, you wouldn't do it by trying to trim the small expenses. No, you'd tackle your biggest expenses first.

If you reduce your labor costs by 5%, for instance, you might be able to save $50,000 per year. But saving 5% on office supplies would probably only save you $50 per year.

The same principle applies in your personal life. If the typical American household cut their grocery budget by 5%, they'd save only $200 per year. If they cut housing by 5%? Well, they'd save $900 per year. So why do so many people put so much effort into clipping coupons while continuing to shell out for more home then they can afford (or need)? Good question.

In the weeks ahead, I'm going to explore different pieces of the housing equation. When does it make sense to rent? When does it make sense to buy? Is it better to prepay your mortgage or to keep it forever? How can you determine how much home you can afford?

If you have a specific question about housing and money, please let me know!

More about...Economics

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steveark
steveark
2 years ago

My cost of housing for a home significantly larger than your peak house is about $3oo per month. With the three kids gone we have three idle bedrooms and bathrooms but being paid for and costing so little to maintain, insure, heat, cool and pay taxes on there is no significant incentive to downsize. Selling this paid for house wouldn’t make a noticeable bump in our investments. We started small and doubled the size of the house by adding on gradually over time with my handy wife drawing up the plans and working on the carpenter’s crew. We never could… Read more »

dh
dh
2 years ago

It’s absolutely insane what one has to give up in terms of time, energy, and money to own a large house/large yards. The 80s are over!!!! I mean, I love the 80s as much as the next middle-aged dude, but now it’s all about getting rid of stuff and scaling down. Having said that, it can sometimes be hard to convince women. As my wise niece once said, “Chicks aren’t into minimalism.”

AA
AA
2 years ago
Reply to  dh

In my experience, it’s been hard to convince men to get rid of their stuff and scale down. All personal belongings can fit into three banker’s boxes. My husband, on the other hand, needs 60. Our almost 18-year-old son needs 40.

dh
dh
2 years ago
Reply to  AA

I have to admit that my main minimalist guru is a woman: Elaine St. James. And for a lot of other men, their go-to guru is Marie Kondo.

Donna Freedman
Donna Freedman
2 years ago
Reply to  dh

Lots of us chicks ARE into minimalism. Maybe the guys who say things like this are scratching around in the wrong hen houses?

My now-ex was a buyer. I hated the clutter, myself.

dh
dh
2 years ago
Reply to  Donna Freedman

Oh, I know, Donna. I’ve been know to scratch in the wrong places, like Tinder. I didn’t mean to start a battle of the sexes here. Tennis, anyone? Calling Bobby Riggs!!! Can you back me up here, bro!!! Lmfao.

As I said, many of my gurus are women — Elaine St. James, Anandamayi Ma, our own S.G., tons of others.

Edgar Reese
Edgar Reese
2 years ago
Reply to  Donna Freedman

Your “now-ex”. haha

Kristen
Kristen
2 years ago
Reply to  dh

I nearly spit out my coffee upon reading your comment! We bought a bigger house with a 1,000 square foot garage – for my husband. He still wants to build a 1,600 square foot shop in the back yard. Until recently he owned three motorcycles. We bought a 35 foot long boat that costs as much as a house. ALL of these things are his doing, not mine. I’d be happy in a 1200 square foot house if it was laid out decently. When I go out and splurge, I spend a couple of hundred bucks. With husband, it’s thousands.… Read more »

dh
dh
2 years ago
Reply to  Kristen

It’s a good point, Kristen, about neither sex having the corner on the market for clutter or spending. Women may have all their wigs, hair rollers, makeup, lotions and potions, nail polish, jewelry, shoes, handbags, infinite clothes, accessories, etc ….. and men have all their damn tools, gadgets, and toys! For the record, my tool kit consists of just *one* Leatherman. 😉

Justin
Justin
2 years ago

I know you’ve talked in the past about moving to cheaper places to live, but sometimes that isn’t possible. I live in a 1300 sq ft cape in Connecticut along “the Gold Coast” that cost around $500,000 (there is nothing more affordable in this area within walking distance to the train to NYC and the beach). I’d be curious on your thoughts on paying off my mortgage early vs. investing that money. I have a good interest rate (3.63%) but if I let the mortgage go 30 years, I’ll have paid over $200,000 in interest. Thanks!

S.G.
S.G.
2 years ago

You had me at “ceilings have gotten a foot taller”. People are bigger. I wonder how much square footage has changed if you divide by the average person’s wingspan ;P.

AA
AA
2 years ago
Reply to  S.G.

People are bigger, but not that much bigger to require housing to increase in size that much. In 1916 the average man in the USA was 5’7″ and the average woman was 5’3″ and it stayed roughly the same until the 1930s. Between the 30s and 50s average male height shot up another 2 inches. Between 1950 and 1980 it went up another .75 inches and since then another .25 inches. In 2016 the average male height was 5’10”. Women have gradually gained 1″ over the past century. The average person’s wingspan is 2.1 inches more than their height. Square… Read more »

S.G.
S.G.
2 years ago
Reply to  AA

Now do girth! My point was tongue in cheek. I am quite tall as is my husband. When house shopping there were plenty of houses that were taken off the list due to low ceilings, ceiling drops over staircases, and in at least one instance a very narrow hallway. I think the real factor is the fact that real wealth is higher. I don’t think the culture changed so we buy houses as much as previous generations couldn’t afford larger houses. I get the complaints against them but people tend to have the home they can afford and always have.… Read more »

ZA
ZA
2 years ago
Reply to  S.G.

I agree its in large part about people willing to live beyond their means. Today in America, approximately 78% of American’s live paycheck-to-paycheck. And one additional factor not mentioned in this article, is with modern Risk measuring (think FICO score), credit is more accessible to people in the modern era than ever before. As recently as a decade ago, people were able to get 6 figure home loans WITHOUT even needing to prove their income or assets.

Joe
Joe
2 years ago

We have 4 people in 1,000 sq feet and it’s pretty cramp. I want to move to a bigger home at some point.
4-5 hundred sq ft/person sounds about right to me. Looking forward to reading more about housing. Our housing cost is high, but the location is very central. We save on transportation, utilities, and other stuff.

S.G.
S.G.
2 years ago
Reply to  Joe

We have 5 people in 2500 sqft. I think you’re estimation of 400-500 is a good one, though it can be stretched based on some factors. For example if you have a really nice outdoor space (and good weather reasonably often) it can really make your house bigger. I realize this every time my kids go outside to play.

Another factor is the age and sex of your kids and if they can share bedrooms. The bathroom:girl ratio, stuff like that…

Accidental FIRE
Accidental FIRE
2 years ago

I agree JD, the size of modern homes per person is just crazy indeed. I think it’s partially because people also accumulate more stuff, plain and simple. To me, those huge homes with tons of empty rooms just seem desolate, and have no character. There’s something to be said about “coziness”, and having a home of the appropriate size that falls into that category is the sweet spot for me

WantNotToWantNot
WantNotToWantNot
2 years ago

Interesting historical overview on U.S. home-ownership rates.

Even though home-ownership has increased incrementally in the U.S., this article (link below) provides date on how the U.S. is falling behind developed nations, largely due to falling rates of home-ownership among young people. Not too surprising (given high cost of education and wage stagnation), but certainly worrisome for the future.

https://www.urban.org/urban-wire/us-homeownership-rate-has-lost-ground-compared-other-developed-countries

Looking forward to the HOME & GARDEN month, J.D.! I hope you’ll cover the fascinating Tiny House movement too…..

Rebecca @ BackroadsMotorsports
Rebecca @ BackroadsMotorsports
2 years ago

Uggg, I agree with you on the cost of housing relative to size. We aren’t subdivision people and in order to get in the “country”, we bought too much house. I preferred smaller but this is the hubs “dream” house. I’m already complaining about the utilities and maintenance. The upside we are so far out I don’t have to pay for internet service, because there’s not any! Fortunately, we were able to get a good price and due to the excellent schools we should be able to sell in about 6 years with a good amount of equity. I’m picking… Read more »

S.G.
S.G.
2 years ago

Is it still his dream home?

Rebecca
Rebecca
2 years ago
Reply to  S.G.

Yes, but we’ll ask after he mows that 3 acres. But since I’m the one that picked the school system, this is our compromise. And I need to get better with accepting this.

Fred Leamnson
Fred Leamnson
2 years ago

Hey J.D. The amount and quality of the content you produce are amazing. Do you sleep? This article nails a big problem. It’s one that has had my wife and I have been caught up in as well. I think the push for everyone to own a home contributed as much as anything to the crisis. The push was there from the government, which caused lending standards to drop, the mortgage amounts Fannie and Freddie allowed to rise, rating agencies to soften standards of the CMOs and CDOs. And did I mention no-doc loans? It was the perfect storm. I’m… Read more »

Jess O.
Jess O.
1 year ago
Reply to  J.D. Roth

Hello! I am writing a paper that involves home ownership from 1920 back to around 1840/1850. You have some valuable information in your article and I was wondering if you might be able to send me some source information. Where did you find your information? Primary or secondary sources? I couldn’t find an email to email directly so I’m posting on here. Thanks in advance!

Ris
Ris
2 years ago
Reply to  Fred Leamnson

My husband and I rent a nice-sized one bedroom apartment (we’re both in our early 30s, TINKs, no plans to have kids) and honestly we love it. I’m more than happy to call the super when something breaks, we don’t have any debt (after finally paying off student loans a few years ago), and it works really really well for us. Our parents (who are boomers) don’t understand why we don’t want to move to the suburbs and buy a place so we can “own something”, but I’m fully owning my happy life as a city dwelling millennial who can… Read more »

S.G.
S.G.
2 years ago
Reply to  Ris

TINKs? Triple income? Or you and Peter Pan have jobs?

Ris
Ris
2 years ago
Reply to  S.G.

Two Incomes No Kids (TINK). Or I live in a J. M. Barrie play. If you ask my parents, there’s not much difference because I refuse to grow up and buy a house in the ‘burbs.

S.G.
S.G.
2 years ago

Hey JD, is there an overlay for that price chart with size? i.e. how does the per square foot price change over time?

S.G.
S.G.
2 years ago
Reply to  J.D. Roth

I’d also be interested in the standard deviation, but you’d need the raw data for that. I’d bet that there is also quite a bit of inflation in specific parts if the country.

lmoot
lmoot
2 years ago

Regarding house sizes, builders are not building small houses anymore. At least there doesn’t seem to be as many moderately sized home builders, as there are “luxury” builders. Also there are less “bring your own builder” options for those who want new homes, or want to live in an undeveloped area, and more planned community builders buying (and thereby blocking off), large swaths of land, and because they own the land (vs being contracted to build on private land), they don’t have to answer to a client’s specs, and as a business their objective is to maximize the land and… Read more »

Sequentialkady
Sequentialkady
2 years ago

Oh dear goodness, I love the layout of this house! http://www.antiquehomestyle.com/plans/sears/1923sears/23sears-alhambra.htm We bought our house in 2000, bought less than we could afford, and made the biggest downpayment we could reasonably afford. (We paid off our house in 14 years!) We also purchased so we would have a 15-20 (30 if traffic is bad) minute commute to work. Smartest thing we have ever done. I’m just dreading that our carpet is 18 years old and it’s going to need a replacement soon. It’s not the cost of it, it’s the having to pack up the house aspect of it. (That… Read more »

Luke
Luke
2 years ago

I’m a 20year old college student who is savvy about personal finance and very worried that we are on the front side of another bubble. Looking at the Shiller scale only reinforces my fear that we are in an inflating bubble. If you were in my situation, would you wait to purchase property until the next bust? Ideally, I would like to buy a du,tri, or quadplex as my first home within the next 5years. I am nervous about inflated prices and high mortgage interest rates coming up in the next few years however. Waiting for the next bust may… Read more »

WantNotToWantNot
WantNotToWantNot
2 years ago
Reply to  Luke

The Shiller scale is aggregated,meaning that not all locations are experiencing a bubble; you have to drill down into your locale. Even at such times, you can still find bargains, but it takes a lot of time and research. At the age of 20, however, I’d suggest it’s too soon to purchase a house. It’s an unwieldy asset. You can’t easily or quickly sell it if your job and location change; buying/selling a home is often a money-loser when you count in all the fees and expenses (those house-flipping shows are largely fantasy). But if you are living in a… Read more »

JanBo
JanBo
2 years ago

We found that small homes are difficult to find and usually in very poor condition unless they are in very urban areas. My best friend wants to downsize in AZ. Unless she lives in a small old condo or trailer court- a 3/2 is the most economical way to go. The tiny house movement is here, but no one wants them in their neighborhood (takes down the prices of nearby houses). Our family has (according to census records) almost always owned houses. Many did not purchase until their 40’s- living with siblings, parents, grandparents or boarding houses until they were… Read more »

stellamarina
stellamarina
2 years ago

Whether to own a house or not becomes a bigger issue when you are retired. To have a house paid off by the time you are retired is way better than having a rent that is only going to increase every year while income stays the same. I see many retirees here in Hawaii move to the mainland where they can finally afford to own a house after renting all their working years here or at least have cheaper rents there.

Lisa W
Lisa W
2 years ago

This is timely because last week I sold my house after being a homeowner for 18 years. A few months ago, JD posted an article that contained a calculator for the cost of commuting. I plugged in my numbers, saw the results ($1100 a month!) and that kicked my brain into hyper-drive. I knew I wanted to make a change but wasn’t sure how or what. And then an ice storm forced me to get a hotel closer to work. So for one night, I was a mile from work, rather than 45. I realized that I was wrong when… Read more »

Don
Don
2 years ago

JD, one reason home prices are up is there are more companies, that buy houses to rent.Over the last 15 years is there are more of them. Another thing is the population of the US has increased.Supply and demand.

Bev
Bev
2 years ago

We rented for 17 years mostly because of living in different places and never sure how long we were going to be there. We lived 10 years in our last place and we rented a double-wide mobile home (1350 sqft) for $940, which was “impossible” to find according to friends. Our landlords really liked us and had only raised our rent $75 in the 10 years we lived there. The time came to move across the country and the rent here for a 3 bedroom (which we had to have having a boy and a girl), was not something we… Read more »

Pana
Pana
2 years ago

Hi Someone in comments mentioned 3.6% interest. Is that low end or high end of interests. What kind of interests you have to pay for mortgages in US? I took 90k EUR mortgage 13 years ago in Finland for apartment worth of 107k. Interest is 12 months Euribor + personal marginal + monthly fee. I renegotiated marginal around 2007 to .38. With current Euribor being -.189, my total interest is around .20 + 2.50eur/monthly. New loans are offered with .6-.7 marginal. Based on newspaper article during this week, people with good financial situation can get as low as .25 marginal.… Read more »

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