This is the second in a series of posts that aim to dispel or reinforce common personal finance cliches. The first looked at the commonly used phrase, “A penny saved is a penny earned.”. Today, we’ll venture into the wonderful world of home ownership cliches.
Home Values Always Go Up… Right?
“Go out and mortgage as much home as you could afford, because housing values always go up.” I was given this advice realtors, friends, and other peers when I looked for my first home in 2007.
History proved them mostly correct. Until 2008. Over 10 million foreclosures and roughly a 30% drop in home values later (with no signs of a rebound in the near future), the “get as big of a house as you can afford” theory has been blamed for being the cause of the housing bubble and ensuing collapse.
Despite the history lesson unfolding in front of our eyes, I still hear from peers that they view their home as an investment vehicle. After all, many in their parents (the boomer) generation are counting on their home as being their primary source of retirement funds, so it’s no wonder where they got this idea from.
Other than during the most recent housing boom (pre-bubble burst), home values tend to return to around the rate of inflation over time. Check out the Case Shiller 100-year home price chart for more on that.
Would you invest in the market with the goal of simply hitting inflation so that the real value of your money never went up? Probably not. So why is it OK to accept that from a home?
Buying Vs. Renting
In reality, homes can be a huge drain on resources. When you look at mortgage costs, interest over 15-30 years, property taxes, upkeep, realtor fees when selling, and energy costs, buying a home can result in a lower return on investment than renting a home or apartment and investing the difference saved.
When deciding whether to buy or rent, I’d recommend taking a look at the price-rent ratio, which can be calculated by taking the total price of a home and dividing it by the annual rent in that geography for a similar dwelling. The lower the ratio (10-15), the more it makes sense to buy in that geography. A very high ratio (20+ can indicate a housing market that has inflated prices).
With high unemployment, high foreclosure rates, slowing population growth, and this new outlook on home ownership, we may not see consistent home price appreciation for a while. And even if we do, there will likely be a number of investment vehicles that will get you a better return on your investment than a home in the coming decades.
Where Else will you Live?
The other thing to consider is that when you go to sell a home, you are left with a dilemma: you need somewhere to live! You can realize a net gain if you significantly downsize or move to a cheaper geography, otherwise, you don’t really keep your investment.
A wise person once told me that the best way to look at a home is with this phrase, “Four walls”. More and more, I am starting to see the wisdom in that statement.
Verdict: False. What once was true is no longer a given. Homes can result in a negative return over the short AND long-term these days. It’s better to look at homes for lifestyle and other benefits versus financial gains. Geography is a huge variable.
Alternative Advice? “Homes can provide a number of great benefits. But strong investment returns are likely not one of them.”
Your Home as an Investment Discussion:
- Do you think this cliche is true or false? Why?
- What are the reasons why you have or would buy a home?
I’ve never seen a house as an investment. Call me whatever you want but if I decide to purchase/mortgage a place to live, you better believe I am going to stay there until the day I die and leave it to my children. The “investment” part for me would be to renovate and maybe build up the house into the most comfortable, enjoyable in the world I would love to be. The freedom in home ownership to do what you wish with the house without having to consult anyone. I currently rent and I am the whim and mercy of a crappy rental company that isn’t helping me with several problems I have with the apartment. I signed on for 1 year and I am only in Month 3 and I already wish to get out of the place.
The investment part comes when the house is paid off and you have no more mortgage payments. I think it is a wise investment to have a home paid off before retirement (depending on your retirement goals). Buying with intent to re-sell at a profit later is high stakes gambling.
Home buying is both an investment and a deeply emotional experience. You should first see that the home you buy has value in it. That can be determined with the CMA reports of the homes in the neighborhood. Then you have to see if you feel home in the home you want to buy. If it does, you are making the right decision buying it. We have to remember that buying a home is a huge financial decision and probably the biggest purchase you will make in your life. It needs to be taken seriously.
If one buys the same home that they would rent, then they are purchasing the functionality that they use. Just as someone purchases a car, clothing, food, …
As long as they don’t buy a variable rate mortgage, then the mortgage part of the cost of ownership remains the same as inflation increases the value of the service the house performs (What would the rental costs be?). Once the mortgage is paid off, the service the house performs is a bargain compared to renting. The real value in home ownership is the reduction in living costs over time.
When someone buys more house than they need, the extra size and cost is basically a non-performing asset. I’ve seen people in retirement who used the equity in their house and I’ve seen people in retirement who sold the large house many years earlier as their children moved out and bought a duplex or fourplex and got rental income for the rest of their lives. The people with renters did better financially.
These days you can’t think about your house as an investment because that would be depressing. I keep thinking to myself it still isn’t a loss as long as I don’t sell it (right now).
Despite the depressed prices, if you have been there a while calculate how much you would have spent renting and you might not see it as a loss. If you were to sell it now and buy a new place, the new place would have the same low pricing so it might not be best to wait.
A house seems like my 401k, tons of fees and it all depends on what the market is doing. A lot depends i believe on How long do you plan on staying put? I am a rare case, my wife’s grandmother passed and she lived in a VERY modest house, which was sold to us $-20,000 under market value and purchased from her uncle who held the title. No banks, no fees just drive down the street and hand him a check every month. He stated if i lost my job i can pay when i find more work but he’s gonna have to keep adding interest,lol. Which is why i bought a house vs rent.
My husband and I are currently in the middle of purchasing our first home. Our situation is a little different than most… I currently own 1/2 of the home and my sister owns 1/2 (it was left to us by our grandfather) and there is no mortgage, so I am getting a $120,000 house for $60,000… which is modest but with the acre it sits on, there is plenty of room to add on if we want, and the house next door is one I will be inheriting from my mother.. We are excited to buy and plan to live there for around 10 years and it should be paid off by then and we plan on renting it out.
I love the idea of home ownership! I just wish it would pay off as an investment. Have you ever noticed that the “traditions” our parents and grandparents pass down (sometimes in the form of laws, other times in terms of personal finance cliches) – don’t seem to pan out for us? Things are changing faster than ever now – so we have to be prepared and no better way then to be without debt- including home debt.
However, I would buy a house because in a worst case scenario if you are getting divorced, I will have something instead of nothing (since he owns the house we live in). Can someone advise if this will be financially prudent? I don’t want to lose my cash, so a house is somewhere to sink it safely I think.
The only thing that has not been stated is the tax shelter and write-offs that come with home ownership. I plan on purchase a multi-family house in the next 6 months and have the renters pay my mortgage and then use the interest as a write-off. These two items will actually make me not only pay less than what I am for rent, but will increase the amount of money that I keep that I make and have an asset that adds to my net worth.
Buying a house is a good option if you want to hedge against rental inflation. It is as good as you pay all your rental upfront, assuming u pay in cash or retire your mortgage quickly. If you are retiring, the inflation hedge will give you a piece of mind.
The thing about keeping cash is not knowing how much money Fed will print in the future. So say if your monthly expense is 2,000 and 800 is rental, by buying a house, only 1,200 of your expenses are subject to inflation. Think of way to hedge that remainder too. In theory, you have achieve financial independence when you have paid all your life time expenses upfront.
What do you think about living in a trailer park/ manufactured home? Low cost home (less than 100k) and pay lot rent instead of tax.
The first question I would ask myself about a trailer or any other home is “If I was renting, would I live there?”.
Yea, and most trailers do have ownership tax.