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Homeowners insurance and the American Dream

According to James Truslow Adams, life should be an opportunity for everyone to become successful regardless of social status. It sees our great nation as a meritocracy. If the Constitution starts with the idea that all are created equal, then all should have the opportunity to grow richer and more prosperous. It’s seen as a reward for hard work and a commitment to self-improvement. Although we have somewhat grown out of the simple view that some streets are paved in gold, there have been enough rags-to-riches stories to make the myth of the Dream appear reasonably true.

In the early part of the last century, we tended to follow the European model and the majority of people rented their homes. But as prosperity spread, more people began to include home ownership in the Dream. It was still a challenge for the majority but, as credit grew more easily available, banks and other sources of lending began to see the mortgage market as a good profit center. Barriers to lending began to drop. Instead of asking for large cash deposits, lenders grew more flexible. When the self-employed asked if their lack of stable income was a problem, lenders were prepared to listen.

The result was a revolution as a majority of people found they could finance home ownership. Indeed, once there was a property in your name, you had security for yet more borrowing. As property prices continued to rise, it seemed you could ride the wave of increasing value up the resale housing market until you had the most desirable home imaginable. Well, that’s always the dream, isn’t it? It’s a shame we have to wake up but, when the housing bubble burst in 2008, many realized they were overextended. A flood of foreclosures has followed. Even now, we may not be at the bottom of the housing market with resale values continuing to fall. Why are those values still falling?

There are two answers? The first is that lenders have raised the barriers back up and are now demanding higher cash deposits and provable incomes again. This makes it more difficult for even the most creditworthy of people to buy into the market. The second is more interesting. There seems to be a change of opinion on the value of home ownership. When rents are, on average, about half the mortgage repayments, you think twice about buying. Then when you add in the other costs, ownership becomes even more daunting. As the owner, you are responsible for paying the property tax - although some landlords do pass on the liability to their tenants whether directly or indirectly through the rent. Then there’s the question of insurance. As the owner, you are looking at a full homeowners insurance policy with full value on rebuilding. As a renter, you usually only pay for contents and not structure - a big saving.

When you add up all the costs, it’s asking first time buyers to make big changes to their lifestyles if they are to commit to buying. If some people were resisting mortgages when the lenders were not asking for any money down, why should they come forward when lenders are asking for a 20% deposit? The Dream is no longer so obviously including ownership. Home insurance policies for renters are growing ever more popular.

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