A Roof Over My Head

…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 ofย  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.

6 thoughts on “A Roof Over My Head

  1. If you’d cut off that analysis in 2005 instead of 2008, you’d see massive profits instead of equality. When I bought in 2003, everyone assumed the same things — that housing prices, interest rates and property taxes would stay about the same or rise slightly.

    The lender selling the 5-year ARM didn’t say “By the way, there will be a world-wide meltdown of the financial system in 2008 so your home value will plummet and you won’t be able to refinance when interest rates rise.”

    Not forseeing what nobody forsaw doesn’t mean we were fools to buy houses.

    Aside from strictly economic terms, home ownership also has intangible benefits. I don’t have to share the patio with the roughnecks from upstairs. I don’t need anybody’s permission to paint my house electric blue. I’ve learned handyman skills to make repairs and I’m entitled to yell at the kids “Don’t Slam The Door, Money Doesn’t Grow On Trees.”

    Freedom costs responsibility, yes; but the kind of person who aspires to live where somebody else take care of his loose bathroom doorknob probably also wants free medical insurance and direct deposit of his welfare check.

    In other words, Democrats.


  2. My final straw (of apartment living) was when my downstairs neighbor passed out with his stereo cranked..and on repeat….so the same coldplay song played over and over and over for 4 hours (from midnight to 4 AM), until I finally called the police.

  3. I’ve always wondered if economists have a way of measuring the value in a home that just comes from being a roof over your head, as you say. My house is a lot more valuable to me than just the mortgage payment because it is warm, dry shelter for me and my family. How much is that worth to me, to avoid living in a box under a bridge? Quite a bit.

  4. At least that box under a bridge can keep that straw-man dry. ๐Ÿ˜‰

    Roosh, these numbers don’t mean squat unless you bought your house in 1975.

    I would be much more interested in the numbers from1995 to 2009. (or, like nate said, from 1995 to 2005 as a comparison.


    “Buy land. They ain’t making any more of the stuff.”

  5. When we bought our current home the market was so-so; within a year, however, the “market” value nearly doubled. We kind of laughed at the unreality of it and avoided all the equity-loan come-ons. We did eventually do a small re-fi to do some remodeling and to switch to a 15-year, fixed rate mortgatge at a lower interest rate. The loan officer couldn’t believe we wouldn’t max out the equity loan. We’re currently in the process of doing another re-fi to shorten our loan duration again; we’ll knock two years off the loan and at least $40k from what we’ll ultimately pay, again at a fixed rate. Our home has never dropped in value below what we originally financed and market value (an ephemeral statistic) is still solidly a plus. Our mortgage payment is not much more than rent for a family home and while taxes, maintenance and insurance do add up we essentially have been paying rent to ourselves. When we ultimately down-size the proceeds will go a long way to providing for our housing expenses the rest of our lives. Our house might not be the highest-flying investment but it provides more to us than just ROI.

    Just owning a house because it’s an investment isn’t enough of a reason to do it, though. Too many have been burned by that philosophy, especially those who overbought at the end of the cycle. You have to buy something that meets your needs and your budget and that includes having enough operating capital to handle the expenses and surprrises; you need to take every low-risk opportunity to shorten the length of the mortgage and cut what you ultimately pay in interest. If you do these things you have a reasonable chance for a happy home and a prosperous life with equity in your home and your community that you don’t get from renting.

  6. I would be much more interested in the numbers from1995 to 2009. (or, like nate said, from 1995 to 2005 as a comparison.

    What exactly would you be comparing them to? Those are the bubble years. The numbers during that time are probably the least “true” since at least World War II.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.