Economist: Buying a house is a bad investment
Yet another economic analysis says that if return on investment is the issue, you'd do better in the stock market.
An analysis of home-price data for the past 30 years in California indicates that the average single-family house is not a good investment, economics professor Robert Bridges writes in The Wall Street Journal.
He offers this analysis, using the value of a median-price single-family house in California: From 1980 to 2010, the value of the house rose an average of 3.6% per year, so a dollar used to pay the house in 1980 would have grown to $5.63 by 2007 or to $2.98 by 2010, after the bust. If you had invested the same dollar in the Dow Jones Industrial Average, you would have had $14.41 in 2007 and $11.49 in 2010.
Or, he says, if you had invested your $19,910 down payment plus homeownership costs that exceeded the cost of renting in stocks, you would have had a portfolio worth $1.8 million in 2010, compared with a house worth $296,820. The Wall Street Journal has a chart comparing the Dow Jones index and the median price of a California home over the years.
"Owner-occupied homes will always be the basis for healthy and stable neighborhoods," writes Bridges, aprofessor of clinical finance and business economics at the University of Southern California's Marshall School of Business. "But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."
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The glorification of homeownership also has implications for the larger economy. Bridges writes:
In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We've diverted capital from more productive investments and misallocated scarce public resources.
Not surprisingly, Bridges' article drew a lot of comments, more than 200 in less than a day, and commenters were predictably split on whether they agreed with his analysis.
Many commenters noted that timing, leverage and psychological factors can tip the scales toward ownership. Randall Dodd wrote:
The author obviously thinks like a statistician rather than a psychologist, and from a statistical standpoint, he makes a reasonably compelling case. The point of his comments might also be summarized as, "Timing is everything."
Regardless, unfortunately, most Americans don't have the discipline to make monthly contributions to a retirement account because the consequences of not following the routine are so far in the future. Whereas, the consequences of not paying one's mortgage — historically anyway — have been immediate, and severe.
So when one factors human behavior and shortcomings into the equation, it's difficult to argue with the "forced savings account" homeownership represents, even if a like amount of money invested in the stock market will most likely yield a bigger return.
What's your view? Is buying a home a good investment? Even if you could theoretically make more money in the stock market, is buying a home a better choice?
Homeownership is not a good investment?? SERIOUSLY?? Conversely, I suppose paying a landlord a monthly fee to RENT a home or apartment is a GREAT investment! When I read these silly articles I have to wonder what the authors are smoking.
As a renter, I dumped approximately 51K into my landlady's purse over a 5 year period, for a place that flooded regularly, was dark, dusty, unsecured and NOISY. These days the costs of renting are RISING and the amount of creditworthiness and credibilty you have to present to a landlord are increasing as well. When I acted as property manager and leased out a house recently, the competition for this dwelling (all fixed up on the inside -- NOT!) was heavy.
As an owner, I pay nearly 100$ less a month for twice the space. The place is GORGEOUS, it is peaceful, it is light. And every single time I improve the property, the results belong to ME. Every single time I pay the mortgage, the part that applies to principal is MINE. If that is not an investment, then I don't know what is. And if I pay it off, at least I will have a guaranteed roof over my head in old age -- which is definitely more than a renter can ever say.
Further, when these articles imply that we are becoming a society of renters, they may as well just come out and say that we are becoming a society of SERFS. We are becoming a society that owns nothing, has few, if any rights, and is entirely dependent on those wealthier than ourselves for survival. Land ownership has been one of the marks of social importance since the dawn of time. I don't see that changing anytime soon.
Not a good investment? Crackheads!
Let's see with numbers how renting actually compares with owning.
If I were to rent a ~2000sqft house I would pay roughly $2000/mo in my area.
A 2000sqft in the same area can be bought for roughly $350,000. Taxes are close to $6000/yr.
With a lousy 5% interest rate the payments would be some 1880/mo + 500 tax = 2380/mo.
Property tax and mortgage interest are deductible - and itemizing makes sense, resulting in even more savings. Suddenly the owned property is cheaper than the rented property - and a chunk goes towards the principal.
10 years down the road the renter would likely pay 3000/mo while the owner would still net roughly 2000 (taxes do increase) and have 70k towards the principal.
So who is getting the better deal???
Of course there is the other side - if someone buys a house for 2-3 years then the volatility of the market, closing costs and selling comission would make owning a bad deal - but for someone who is ready to settle down and live 10+ years in a house owning is by far the best.
Home ownership is an excellent investment when done correctly. Some of the reasons home ownership is an excellent investment are:
- A person/family has to live somewhere whether it be renting or owning.
- Paying rent is generally more expensive than paying the interest on a home loan
- Interest paid on a home mortgage has the added benefit of being tax deductible
- Generally a home will be paid off when you get to retirement age. Once retired an individual wouldn't have to adjust retirement income for the rising cost of renting (generally trending with inflation). Rather the retired home owner would only have to account for property taxes, utilities, etc.
- Once locked into a fixed mortgage a person/family knows what their living space will cost them in upcoming years. Generally a families gross income will increase over time giving them increased spending/saving capabilities. Renting on the other hand generally increases over time.
However, home ownership can be a bad investment when not done correctly. A few potential reasons for home ownership being a bad investment might be:
- Planning to live in the house for only a short period. Buying and selling houses in short time frames means the owner has to deal with realtor feas, closing costs, and potential risks with housing market flunctuations.
- Buying a house above what one can afford. By this I mean that the individual/family is not able to put money into savings and retirement funds at an appropriate rate.
- Purchasing a house too far from work. This can add strains due to fluctuating costs of fuel, accelerated vehicle depreciation, etc.
- Bad luck is another potential short fall of home ownerhsip. Loss of a job, health issues, natural disasters, etc. However, bad luck can happen with investments as well.
I am sure I missed some points, but these are the thoughts behind my family owning a home.
You buy a house to make a home not for financial gain. As @bboop says you are paying repair costs when I elevate your rent in my building. When I redo something in the building I can apply again for a rent increase.
Additionally, with a fixed mortgage I know what my payments are for the next 15 years. Now as people lose houses my rents are going up again. Also, what is it like to be told if you can't afford the rent increase you have to move and return the apt. to it's original condition~at the age of 64?
Can you have your daughter's sweet sixteen in your apt. as you can in your home for memories.
But the biggest point the article missed is the building of wealth through generations. By passing on the property I am supporting my children, grandchildren, etc. Or I am paying for my retirement. Can't do that with an apt..
And just because I own a home who says I don't invest in the stock market?
Okay. But you can live in a house. Housing is still your biggest expense. Try doing that with your stock market. Renting is a dead-end.
Or did you plan to live in an empty sewer conduit until you can cash in your stock?
The base of all wealth in the United States, lays in land ownership.
As an owner of rental property, I charge enough rent to set aside for repairs, taxes, AND make a profit. I'm not in it to be nice to folks. I have my primary home which renters are helping to pay for. Improvements are made to keep the property appealing, but as costs go up, so does the rent. This is a business, folks. The argument that you don't have to worry about the upkeep is only as true as the fact that you don't pay the repairman directly, but through the amount I charge above the mortgage on that property.
My primary home is just that - a home I plan to always stay in, a place to make memories - just like the old days when a home was where the heart is.
[Begin Quote] "So when one factors human behavior and shortcomings into the equation, it's difficult to argue with the "forced savings account" homeownership represents, even if a like amount of money invested in the stock market will most likely yield a bigger return. " [End Quote]
I've made this very decision. I bought a home in June 2006. This could'nt have been a worst time. Timing is everything as the article suggests. I've decided though to stay in my home even being underwater. My reason is this. It's like my own personal bet on the USA. My hope is that in time values will return and when they do I'll refinance to lower my payments then, not take a home equity loan. This will further reduce my mortgage payment and living expenses. Currently I'm 38yrs old, but when I'm 65yrs old the house will be paid off and I'll live meager. Americans want it all. Thats part of the problem here. Having a home and a buck in your pocket could be satisfying if that was good enough. I've seen to many people out live there retirement money or drop dead before spending a penny. Maximize your life, not profits...........
If two people each make a $1000 a week and each are putting out about 30% on a place to live whether they rent or own. Wouldn't they both have a bout the same to invest. Either way they have to put a roof over their heads. Let's say each of them invested 20% of their income after housing expenses, the home owner wins. They have home paid in full in the end, no more rent due and the stock market investment of 20% as well. I don't get your math.
Thanks for the boost, Teresa. I'm in the process of buying a second home because the pendulum has swung too far in the other direction. Here's how it works for me: I get a nicer home for less than I owe on my current house. I rent out my current house and get someone to pay the mortgage on it. My net outflow does not change but now I own two homes instead of one. Oh...and I also continue to put money aside toward retirement. Run the math on that one.
Please keep writing articles like this so that the lemmings in this country can continue driving home prices down further. That way, I can buy another one in two years. Rents are projected to increase 4-5% per year in the near future. I guess that's my hedge for inflation now, isn't it?
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.