…and a hole in the ground.
But an investment? …not so sure any more.
Another advisor and I were just talking about this over lunch on Friday: is one’s home an investment or just a place to live?
The former is only true to the extent that paying off the mortgage and residing in a home long-term is at best a forced-savings plan.
Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year after inflation. You would have earned well over 2 percent per year after inflation had you invested in Treasury bills over the same period. And you would have earned even more on riskier investments: After inflation, Moody’s corporate bond index rose an average of 6 percent per year between 1975 and 2008, while the S&P 500 stock index rose an average of 8 percent per year. Most of the return from owning your home comes not in financial gains but in the benefits you enjoy by living there.
One percent – now figure in the new roof every twenty years, interest, property taxes and other maintenance factors and renting starts looking real good about now.
Short term, home values may stabilize but they are unlikely to grow in value, at least in a sustainable fashion, any time soon. Any bump in values may very well be met by house-poor baby-boomers taking the first opportunity to dump homes larger than they need as their progeny jet off to university and their advisors tell them to take the equity and run.
Economists and real estate experts are grasping for any indication of how much “hidden supply” is out there waiting to come to market. First, there are home buyers who would like to sell but are waiting for better market conditions.
Moreover, the government allows a once-every-five-year opportunity to harvest a half million in equity tax free (for married couples; a quarter million for singles) for your primary residence.
Both of these factors will apply downward pressure to home values for the foreseeable future. The message? It’s all about your time horizon.
If you are young and plan to own a home for twenty years or more, owning will probably still make sense. If you are a late fifties executive living in a home better suited to a family of five, three of which are long gone, you’re probably waiting for the market to pop up so you can sell and invest the proceeds for retirement.
…and rent a nice condo from now on. There isn’t enough time to outgrow the opportunity cost of the down payment or transactional friction of closing a mortgage and real estate commissions on both ends.
It’s true that if you own, you don’t have to write a check to a landlord. However, you have to cover all the costs of maintaining the house. It is the same house with the same operating costs, whether you pay them directly or whether you pay rent to cover them. By covering these costs as the owner-occupier, what you spend (including your mortgage payment) comes very close to what you would have spent if you rented your house.
Many of us own because it is a way to commit to saving by building equity over time, but we should not expect to make large profits. Housing is an expensive durable good, and durable goods are costly to maintain. The main reason to own is because you really like your home, not because you think it makes you money. It doesn’t.
The Great Recession is proof that the government’s (and especially Barney Frank’s) reach exceeds it’s grasp as it regards converting The American Dream of home ownership into The American Entitlement. So if you are in the market for a home for the first time, don’t let Obama’s tax credit sway you.
Just because you got an $8,000 tax credit toward the purchase of a home doesn’t mean that you actually saved $8,000. In areas where there is strong demand for housing and the supply of new housing is limited — including the Washington metro region — tax credits may result in the bidding up of home prices. In other words, the program has probably led to higher prices in these areas than we would be seeing without it. This means that some of the benefit of the tax credit is being passed on from homebuyers to home sellers.
Plus, anyone that jumped on this deal in 2008 has to pay it back.
As a result of ill-advised liberal intervention, a sea change is afoot as homeowners shaken by the economic carnage of late are questioning any and all assumptions they held dear just a short eighteen months ago.
Ironically, the virtue of home ownership may be one of them.