Home Ownership and Economic Lesson

By Lawrence Doe

I started my first business in Traverse City, Michi­gan. As an accomplished artist and leather smith, the storefront was well enough received to get the attention of a philanthropist inter­ested in supporting young business startups. Wilbur Munnecke was the gener­al manager of the Chicago Sun Times and a summer resident in Leland, Michi­gan. He liked what he saw in my retail shop and manu­facturing setup. Upon leav­ing, he said he would refer me to his friend, Ivan Eg­ler, to review my financial records. Ivan P. Egler was a civilian financial consul­tant to the Pentagon during the Vietnam War. He and Munnecke had been friends since childhood when they met in Leland where Ivan lived and Wilbur’s Chicago family had a summer home.

Ivan liked my bookkeep­ing but wondered where my profits were listed. I pointed to the column of my salary. The abundance of my artistic sales was ev­ident, but so was my busi­ness ignorance. He had to explain to me the difference between my wages, as a cost of business, and prof­its that would attract an in­vestor. He explained to me that an investor wanted to know what “rate of return” (RoR) they could expect on an annual basis. Knowing the RoR on a quarterly ba­sis was even better because an investor wanted to know where they could make the most money on their invest­ment. I very naively asked, “Isn’t that greed?” Mr. Egler was slightly taken aback, chuckled, and said, “Well, that might be, but that’s how it works.”

I’ll save the end of that story for another time, but these two successful adult men left a lasting impres­sion on me as a 23-year-old. As an artist and crafts­man, my focus was on the quality of my products and the buying customers who paid me money. As a businessman, I needed to shift my focus to investors whom I would pay for their financial support. The part about investors wanting the most money, the best rate of return (RoR), made me realize that businesses must compete with each other for those investment dollars. Because investors are paid from the business profits, there is pressure to lower costs of production and increase sales prices to expand profits to attract and keep investors.

The low-hanging fruit of profits in the United States was picked in its first cou­ple of hundred years. Un­fettered resource extraction, mass immigration, with in­frastructure and industrial expansion created many opportunities for individual and company wealth accu­mulation. These opportu­nities are fewer now as the US has evolved (like many industrialized nations) into a “mature economy” de­fined as “a shift from infra­structure [and middle class] development to increased consumer spending and the decline in Gross Do­mestic Production [GDP]”. To maintain investor RoR, companies go offshore where the cost of labor and parts is lower. You will no­tice that automobiles have increased in retail price even as foreign parts and labor costs are less. This illustrates the need to con­tinually expand company profits to fulfill the expec­tations of investors. The stock market report often lists companies whose prof­its fell “short of expecta­tions”. This negative re­porting doesn’t mean they lost money, but they didn’t earn enough to meet share­holders’ wants.

Since our mature econo­my produces fewer tradi­tional opportunities, busi­nesses and investors search for new profit centers. Novel approaches and new products are invented to get consumer dollars. Consid­er Big Tech mining the pub­licly owned airwaves for profits. Have you noticed that broadcasting that was once free with an antenna is now only available with a paid subscription? Previ­ously, one could mail letters to friends, pay bills, and or­der products with postage stamps costing nickels and dimes. Currently, this type of communication is done with a three-hundred-dol­lar computer, a one-hun­dred-dollar printer, and a two-hundred-dollar cell phone, requiring a one-hun­dred-dollar monthly bill. That seven hundred dollars would buy a lot of stamps, but try to live a modern life without those devices and their costs. Housing, one of the most basic human needs, is an evolving prof­it center as ownership of starter homes is bought up by commercial investors.

The American tradition of home ownership is now tar­geted as a new profit center for business and investors. Some young adults are choosing to rent housing, but others who would like their own home are unable to enter the housing market. Cost and availability are the main factors. Labor and ma­terial costs have driven up real estate prices; however unavailability of affordable housing is the greatest bar­rier. Young home buyers are competing with large institutional investors for starter homes. Individu­als are looking to fulfill a dream of long-term home ownership and its ability to build family wealth. Insti­tutional investors convert these single-family homes into rentals for their poten­tial high rental yields and long-term value apprecia­tion. It is that opportunity for appreciation in value that is being deprived of single individuals and fam­ilies. In the St. Paul metro, a private home purchased in 1990 for $80,000 was valued at $400,000 in 2020. By 2025, its assessed value was $505,000. That home has built wealth for multi­ple families in its 100-year history. If large real estate investors turn that house into a rental home, future families will experience a net loss of their potential wealth. That value will be transferred to investment companies that have no­ticed the increase in yearly appreciation. Home values have moved from the his­toric 3-5 percent to the cur­rent annual 8-9 percent.

Renting a place to live is a subscription, like those paid for media airwaves and cell phone use. True, a specific service is supplied to the customer in exchange for money. However, indi­vidual customers don’t ac­crue any long-term wealth from those expenditures. Increasing rental income and long-term value appre­ciation is the wealth gar­nered by commercial inves­tors and their clients.