The Fallacy of Homeownership as a Sound Investment

By Brandon Laughridge on 23 November 2009 (Updated 1 March 2010) 40 comments

Homeownership is ingrained in the American psyche. Beyond that, the idea of owning a home has become a moral imperative in the United States. Presidents from Herbert Hoover to George W. Bush have extolled the virtues of homeownership as a symbol of American freedoms and values. "No man who owns his own house and lot can be a Communist," the preeminent 20th century builder William Levitt famously said.

Owning a home has become inextricably linked to the American dream, as much a part of the social fabric as baseball and apple pie. But the reality is that most Americans would be better off buying shares of Apple instead of trying to use homeownership as a vehicle for wealth creation.

The contention flies in the face of maxims and political mantras that millions of Americans have accepted as Gospel truth. But the numbers, the economists and the historical patterns lead to the same general conclusion: Homeownership is not a wise investment.

A Dearth of Diversity

There's a cliché about eggs and baskets that's rather apropos here. In most cases, investors would shudder at the thought of pumping a majority of their capital into a single stock, no matter how blue the chip. But that's exactly what most homeowners are doing. And it can have devastating long-term consequences given the unpredictable, fluctuating nature of the housing market. Just ask the thousands of near-retirees nationwide who've been forced to hold off on retirement because of the one-two punch of diminished stock portfolios and plummeting home values.

"You're supposed to diversify as much as possible — put your money into stocks, bonds, many different geographies — and then use the income to rent whatever you like, which allows for greater flexibility, as well as efficiencies," Robert Schiller, a professor of economics at Yale University, wrote in an October 2008 issue of Newsweek. "The popular argument that renting is throwing money down the drain is really fallacious, since if one rents one can invest the money one would have put in the home in other investments, and so offset the rent with the dividends from the investments."

Homeownership can become a black hole for income that could otherwise be redirected into investments with more stable, proven returns. Isn't the stock market risky? Sure, it certainly can prove tumultuous, especially looking at the last two years. But for most homeowners interested in maximizing return on investment, history is not on your side...

History is Not on Your Side

It doesn't square with the American mantra of homeownership, but there are numerous studies from economists, real estate experts, sociologists and others that continually lead to the same conclusion: Homeowners are lucky to break even when using their home as an investment. The reality is that, in most cases, historical returns are much more favorable for the stock market and other forms of business and even real-estate investment.

For example, the average appreciation for U.S. homes was 5.6 percent from 1987 to 2006, according to the S&P National Home Price Index. Adjusted for inflation, that's more in the ballpark of a 3- to 5-percent return. Factor in the 2 percent expense ratio of owning a home (the cost of ownership as a percentage of its value over the course of a year, as defined by The Motley Fool) and those margins shrink even further. At the same time, there are proven, big-time companies whose returns have far outstripped market averages for decades.

Economists also point to the Case-Shiller index, a composite of 10 major cities. The return on homes is a mere 1.14 percent a year over inflation since 1987. Since 1994, the figure has increased slightly to an annual return of 4.7 percent. But factor in inflation during that span (about 2.5 percent) and you're still looking at thin margins — around 2.2 percent annually above inflation. As the Wall Street Journal recently noted, investors routinely perform better with government bonds.

Buying a House is Just Renting Anyway

Speaking of mantras and clichés, there's one in particular that tends to dominate the buy v. rent discussion: Paying rent is simply throwing away money every month. But how many homeowners get back their mortgage interest payments, or their property taxes, or their monthly maintenance expenses?

Homebuyers spend a good 20 years paying mortgage interest before their monthly payment starts scratching away at more of the principal than the remaining interest. In essence, homeowners are renting money from their commercial lender. Compounding that is, well, the compounding. Homebuyers will typically pay for the cost of their home again just in interest payments. Factor in two or three decades of property taxes, insurance, maintenance and improvements and a $300,000 home quite easily becomes a $1 million purchase.

Here's an example with some numbers:

You want to buy a $200,000 house. You put down $40,000 (at 20 percent you avoid mortgage insurance) and finance the remaining $140,000 at 5.25 percent on a 30-year mortgage. A decade later, you decide to sell your "investment" for $300,000.

It's here that some homeowners are tempted to proclaim they made a cool $100,000 profit on their home investment. Ah, but not so fast...

The Fallacies of Cashing Out

With homeownership, appearance and reality are two very different things. Let's keep that same example. After the first 10 years of payments, you will have spent about $100,000, with more than $75,000 going solely toward mortgage interest. Include the $40,000 down payment and that's about $146,000 during the first decade.

At the time of sale, you can subtract the remaining mortgage balance and sale proceeds. You're left with a whopping $22,684 return.

But that doesn't include the money you've shelled out during the last 10 years in property taxes, insurance, maintenance and improvements. Taxes and insurance over the last decade could easily total another $35,000 to $40,000. Now you're losing money — big time. And we're not even worrying about inflation.

Tax deductions could offset some of the pain during that decade, but certainly not enough to ease the pain.

Homeowners can easily overlook the mountain of money they've spent during the course of owning a home when the time comes to sell. There's something about holding a six-figure check that somehow disables the brain's ability to do simple math.

The costs of homeownership rarely meet up with price appreciation. Homeowners who bought in the Dallas area in 1986 didn't see home appreciation until 1998. In 2000, Los Angeles homebuyers finally saw home values return to what they been in 1990. Beyond that, money spent on upgrades and improvements don't generally translate into extra dollars in your pocket come closing day.

Whatever "profit" emerges upon selling your home, chances are you've already spent most of it on taxes, mortgage interest and upkeep. Besides, that "profit" is usually short-lived anyway. Many people turn around days later and pour those funds into a new mortgage.

It's a Lifestyle, Not an Investment

Despite the political pronouncements and moral imperatives, homeownership is not a wise investment. But it's an important cornerstone of American society — one that people still hold tightly to despite boom and bust cycles and the overall grim economic picture. A Rasmussen Report in September 2008 showed two-thirds of Americans believe home buying is the best investment families can make.

While that notion is a complete fallacy, its pervasiveness speaks to how deeply rooted the concept remains, despite mounting evidence to the contrary. For many Americans, homeownership is a right that brings an autonomy and self-fulfillment that renting will never inspire. If owning a home suits your lifestyle, find a trusted lender and the home of your dreams.

But don't view your home as anything other than a place to hang your hat. Grand visions of home ownership as the path to wealth creation will likely leave you hanging your head.

This is a guest post by Brandon Laughridge. Brandon is the editor of the Mortgage Loan Place blog.  MLP focuses on providing free mortgage tools and educating consumers about all types of government mortgage loans.

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Guest's picture
Guest

You can counter the downsides you mentioned by staying in your home 15+ years and paying extra each month which makes a huge dent in interest paid.

Guest's picture
Guest

Or be sensible and DON'T GET A HOUSE/MORTGAGE BEYOND 20-25% of your monthly income. AT best buy smaller than you need to keep from PACKRAT consumerism of **** you don't need piling up in your oversized house closets uneeded floor space and finished basement/garage areas.

I bought a house to match previous rent of a one bdrm apt@ $550/mo or 56k mortgage in 1990, in a transitioning neighborhood, ended up subletting after 4yrs, letting the tenants pay my mortgage, and then remodeling selling it for > $8k profit @ 75k in '98, getting back all of my mortgage, interest and fix/repair investment.

Telling people not to buy a house is leaving property for the wealthy and developers while common civilian populous becomes permanent squatter peasants renting the lord of the manor's land and property to live on with barely an income.

Increasing homeownership, People need to live within their means and become like their parents/grandparents, who had decent comfortable lifestyles in 50-60's in one story ranch style housing or fixer up older 2 story farm colonials, instead of overpriced suburban McMansions on interest only mortgages.

Guest's picture
Guest

I spend $1000/month on my "purchased" home, including taxes and insurance, but without repair costs included since they vary.

To rent something comparable it would easily be twice that -- if I could even find a 4 bedroom rental. Admittedly, I lucked out by wanting a house just before the housing boom that made the prices go crazy, so I got both the low interest and the low purchase price, but you can get similar deals now too.

Then, when I'm done with this house, I get to sell it. It may not make back everything I've spent in interest, but I will get something. If I was renting, I would get my security deposit returned. After only "owning" my house only five years, the difference between what I still owe (yes I have paid down the principle) and what it would be worth even on this (possibly depressed) market is approximately $50,000.

It may not be an investment versus putting money in the stock market while living in a box, but it does something. Unless you are planning to stay in your parents basement for all your life giving you freedom to invest anywhere you want, you will still need to pay for a place to live. Compare to dollar investments OR to rental properties for a reasonable arguement, not both. As far as I've heard no one is offering me free room and board to put my money in the stock market.

Guest's picture
funkright

they don't add up, just an oversight..

"Here's an example with some numbers:

You want to buy a $200,000 house. You put down $40,000 (at 20 percent you avoid mortgage insurance) and finance the remaining $140,000 at 5.25 percent on a 30-year mortgage. A decade later, you decide to sell your "investment" for $300,000."

Guest's picture
Rick

You give a good list of the cons. However there are pros as you are aware.

You are the boss, it's your home. I was able to build my basement how I wanted it as well as other changes like making my home more energy efficient. To rent the equivalent size house would cost more than I was paying on my mortgage. I can have family stay for extended periods. Years ago when I rented my rent was raised because my brother stayed with me. You can put down roots in the neighborhood because you are less likely to have to move because the landlord raises the rent. You get a tax deduction on your mortgage and property taxes. You can use home equity. It's hard to raise five children in an apartment, a house is better. You can grow a garden. Many times a house stands alone which is much better than a noisy, crowded apartment complex.

I paid for my home in 19 years. The trick is to buy a modest home (here's a photo of mine: http://www.rickety.us/2008/08/a-property-tax-alternative-the-home-consum...) at a fixed rate interest and don't add to the principle when you refinance. Wherever possible make repairs yourself as you go along, mow your own lawn, and keep up on maintenance. It is not that difficult. Remember, you are making a home, it's worth the effort.

Guest's picture
croatian1

Yes, I was taught by my parent's to set down roots with a home. But they also taught me to buy what I could afford versus what I really, really wanted. That said, my parent's started talking about us buying a home 5 years into married life. At the time we were 28 and I was scard to sign my name to something for 30 years. Thank god we listened to them! Now, 20 years later we are 5 years from paying off the mortgage. We will have 5 years after it is paid off before we look at retiring so that mortgage money will go into our retirement accounts. Now, when we retire we are looking at lake property and selling our house in the City. We bought before the homes in our area started to inflate. Yes, they have gone down a bit but we still have more than doubled our money. As things pick up we will be able to sell and buy our dream lake home without a mortgage. So, yes it has been an investment for us. Homeownership is not for everyone, but having worked in the rental business for 6 years as an apartment manager I can guarentee that those yearly rent increases for the most part are unnecessary, just money in the owner's pocket. Where we were there the average rent increase each year was $25/month. I am so glad we took my parent's sage advice and we have encouraged our younger family member's to do the same!!

Guest's picture

For me, I am definitely pro renting for the number of reasons listed in the post I wrote here: Why I rent instead of buying a home

Bottom line: It only makes sense if the math makes sense.

Calculate rent for the next 40 years, then calculate home ownership, maintenance (3% a year on average), mortgage costs, landscaping, etc.

I'm not against it, but I really do believe that home ownership is something that is a nice to have, but not an investment.

It may have been in the past, but not any longer due to the fact that you just have to look at the CONSTRUCTION of homes here in North America vs. ones in Europe.

It dims my enthusiasm to buy anything made out of chipboard and badly tacked together beams of wood.

I'd have to look for something from 1970s or earlier to get any decent construction or materials!!

Homes in Europe cost more, but it's because they're made out of brick and stone, and made to last.. able to be passed down to your great great great grandkids with hardly any maintenance.

Read my whole post on it: The Emperor has No House

It all boils down to individual decisions -- for some, it's a GREAT idea, and a smart investment. If the math works versus renting then do it.

Don't buy it blindly because "everyone said so".

For me,... not so much. I did the thinking on it, and it's a black hole of debt disguised as investment.

Guest's picture
Ghosts say Boo

We love "owning" a house. (8 months in on a 30 year mortgage!)

Here's why it's worth it for us:

We have a yard
We have a garden
We can decorate how we want
We have a garage
We can drill holes in to put up shelves
We can make the house more energy efficient and live here long enough to recoup our investments
We can add a bathroom
We can run cables through the house and drill through the floor/wall to terminate them properly!

We bought based on the distance from my work. If we rented within the same radius (20 minutes or less by car was the goal. We are 15 minutes away) it would be $1000/month for an apartment with the same sq/feet without a yard or garage. We pay $850/month on our mortgage.

Those benefits are worth saving $250/month to me!

(Things are probably different in different locations. I'm in the Twin Cities).

Guest's picture

The main problem we're trying to work off in the housing market right now stems largely from the almost universal view of a house as in investment. That caused people to buy more house than they could afford, to trade up regularly and to leverage it to debt levels never before seen in history.

Much of the cheerleading around real estate is driven by those who are in the business (builders, RE agents, etc) and those who see housing sales as a good way to drive the economy through additional consumption.

That's another problem in itself--the economic cheerleaders know that when you buy a house, you'll buy a bunch of things to go in it, on it, and in the driveway--a one household spending spree! And statistically, it's true! So it isn't just the cost of the house, it's all the chattel that goes with the purchase. No one ever factors that into the mix.

A house was a SOLID investment back when people made larger down payment, took fixed rate loans, and paid them off well ahead of schedule. A mortgage free home has always been the goal of the typical homeowner...until now.

Guest's picture
Guest

"Bottom line: It only makes sense if the math makes sense. "

It's this statement that makes zero sense to me. It buys into the same "your home is a financial investment" propaganda that encouraged people to buy too much home with ridiculous ARMs. It just supposes that a home is a BAD investment instead of a GOOD one. If a home is not a financial investment, then judging home ownership based purely on finances is as much of a fallacy as ignoring finances completely in hopes of a giant return.

There are plenty of great reasons to buy a home that have nothing to do with "the math." Stability for example. Perhaps you don't feel like yanking your kids into a new school when your landlord decides to sell (or move back into the place himself). Or you want to be a part of your neighborhood or community for the long term.

Maybe you want to build a sustainable lifestyle by doing things your landlord won't allow (gardening, raising small livestock, installing solar to get off the grid, installing energy efficient appliances, adding a cistern or grey water facility, etc.). Maybe you just want to paint all the rooms the colors you like.

Finally, you may want to leave a legacy. You may not pay off the house until you're old, but imagine leaving a paid-for house to your descendants. The value there has nothing to do with the dollars invested.

Alternately, there are some good reasons to rent. Flexibility, for example. You aren't tied to a single location. Low maintenance -- the landlord does everything. Freedom from the tyranny of property values -- when a meth lab starts up next door, you can move.

My point is that financial considerations are the least of what people should consider when they make the buy or rent decision. Of course I'm not advocating ignoring the math entirely -- if you can't afford it, you can't afford it -- just that the math shouldn't be the determining factor.

A home is not a financial investment -- good or bad. It's an investment in a certain kind of lifestyle that may be, for you, very good or very bad.

Guest's picture
Cliff Masters

I agree with the comment that home ownership is not all about investment. There are many tangible and intangible benefits to ownership. As some has already pointed out, what do we actually own in this life? Stop paying your taxes and see how long you own anything! But still, if we play the game as best we can, there is much to enjoy with the fruits of our labor. Staying within our means is the big thing. For me, renting is too restrictive. I enjoy the freedom of home ownership. Fortunately I can do my own repairs and upgrades. This too is for the most part enjoyable. There is always a "but". But my wife can also nag me to fix something and I can't say it is not my responsibility, call the landlord. No, the buck stops here!

Andrea Karim's picture

You make an excellent point about viewing a home as an investment. It is rarely that. Sure, it's a place to live and call your own, and you have the freedom to decorate, etc. But it's not a money maker... well, not for you, anyway. For that bank, though, it certainly is.

Guest's picture

Guest (9)--"It's an investment in a certain kind of lifestyle that may be, for you, very good or very bad." Brilliantly written.

But I'd like to take that line a step further. Back when people were largely buying farms and houses with shops or storefronts in them, buying a lifestyle was part of the package.

But today, the vast majority of people buy very similar type detatched homes and condos. There are millions of homes built in subdivisions that look substantially like every other house in the same subdivision, or in multiple sudivisions.

How is that a lifestyle? Or is it that we all desire the same lifestyle? (That's an entirely seperate topic worthy of it's own post!)

My point is, even the idea of "buying a lifestyle" doesn't hold up, unless of course the utlimate goal of that "lifestyle" is to be just like most everyone else. And you can rent a place and do that, with a lot less money tied up too.

Guest's picture
Cliff Masters

I too have a lot of difficulty with the stamped out, non descript, box of a house we often see today. Many "neighborhoods" today are not much different from apartment buildings. The only difference there may be a couple of feet between living units. This is a very narrow life style.
What would the average American living in their modern neighborhoods do if they suddenly lost all utilities? Like water, electricity, natural gas. What if all transportation was to come to a halt? Like if our nation was hit with a high altitude nuke producing EMP, wiping out all things electronic. How many people could get their own water and produce any food? Most Americans today would not know how to grow a dandelion much less a garden. Yes, lifestyles are a lot different compaired even back during and right after WWII days. New Orleans and Katrena proved that.

Guest's picture

It would be great to just have that $200,000 dollars at the start to invest in the market, and then live off the interest. But most of us can only make payments either for rent or for a mortgage.
I also think that, like the stock market, there are wise investors and not so wise. Spending 30 years to pay off a 200,000 dollar house would, in my opinion, fall into that not so wise category. If you can't pay it off in 15 years, then you have bought too much house for your budget. And if you can double those principle payments early on, you can save yourself thousands on interest payments.
And then, when it is paid off, you don't have to pay it anymore. You can live there for as long as you want and you just pay your utitlities and taxes and maintenance.
I know, the idea of living mortgage free is new to some people. But it is possible, and it frees your money up to invest in more diverse options.

Guest's picture
James

Is there not something to be said by being debt free with no mortage or rent at some point in life? If I spend three times the selling price of my house over a thirty year span hopefully I'll maybe break even if I sell or my kids will have a pretty good piece of property when I die. You are correct in that the the home you live in is not an investment. For an investment you want someone else to live in it & pay the mortgage for you. But I still think buying is way to go BUT DON'T OVERBUY. That is where most people make their mistake.

Guest's picture

@ James

What do you mean by don't overbuy? Im sorry I dont think I understand what you mean...

Guest's picture
Guest

To "overbuy" - To buy more than you can comfortably afford. Financial planners suggest spending no more than 35% of take home pay on housing. Most people are way over that. No data to back that up- just opinion.

Guest's picture
Meg

One of the main advantages to owning is security - if you get a fixed rate mortgage you lock in your monthly housing payments indefinitely; the cost to rent goes up each year. And once you pay off the home, you can live without much in the way of housing costs in retirement, which will significantly reduce the income you need from your investment portfolio.

Shiller says "if one rents one can invest the money one would have put in the home in other investments, and so offset the rent with the dividends from the investments." That assumes that you can rent for cheaper than it costs to own, which isn't true in most of our country. It also assumes people would actually save the difference, and it further assumes they'd invest it wisely, not touch it, and the market would perform according to historical standards. Lots of assumptions just to "prove" that the benefits of homeownership are "fallacy."

Besides which you are forgetting the power of LEVERAGE. Yes, homes only appreciate around 4% a year, but you're earning that 4% on the entire value of the house - when you actually only invested 10%-20% of the cost of the home. That puts your real return in the double digits in most cases, not including principal paydowns.

Guest's picture
RJ Weiss

Brandon,

Very nice article on the advantages and disadvantages to owning a home.

I mostly agree with your last section. My wife and I really wanted to own a home. For about 5 years, we moved once a year. We did it the smart way, large down payment, fixed interest rate, etc...and it has worked out great so far.

Numbers wise, only time will tell if we will have "invested correctly", but we have enjoyed our home immensely.

Guest's picture
Kathy F

"...Besides which you are forgetting the power of LEVERAGE. Yes, homes only appreciate around 4% a year, but you're earning that 4% on the entire value of the house - when you actually only invested 10%-20% of the cost of the home. That puts your real return in the double digits in most cases, not including principal paydowns."

Earning double digit return on investment??? How is this possible? Yes, house may appreciate at 4% per year, but you are paying maybe 5% interest per year on 80% of the purchase price, so maybe you break about even on return for many years, until a the interest payments start going down. OK maybe only paying net 3.75% interest per year after 25% tax bracket deduction. Still I don't see how you get double digit returns. Also any money you "earn" is not liquid cash for spending. You have to sell the house to get it or borrow it back through home equity loan.

Guest's picture
valletta

This is definitely YMMV.
I bought my house 20 years ago for $200K
and it's now "worth" $900K, even after the 18% decline last year in my area.
I will never sell it, if we ever move I will rent it out for income, which in my area is about $2500-2900 per month.
I think it's too hard to generalize, everyone needs to assess their own needs and wants and then crunch the numbers.

Guest's picture
Des

The numbers is this article don't add up. The author quotes the S&P National Home Price Index as saying housing prices go up 5.6% per year. If that is the case, then a house purchased for $200,000 would be worth $344,880 after ten years.

If the owners put 20% down, they would be putting $40,000 down and financing $160,000 (not $140k, as stated). After 10 years, the owners will have paid $106,000 in principal and interest, about $25,000 in taxes and insurance, and about $54,000 in repairs based on 2% of value (which, frankly, seems high to me based solely on personal experience.) That means the owners have paid $225,000 and are selling the house for $344,880.

After the real estate agent takes their 6%, the owners are left with about $99,000 TAX FREE, as they avoid capital gains from having lived there more than two years.

In addition to that, if they are in the 25% tax bracket they have also saved $19,250 in taxes over that time frame, bringing their total to $118,250 on a $225,000 investment.

BUT, that doesn't factor in that the owners would have had to pay rent somewhere. After the $40,000 down, the owners paid an average of $1542 per month on their total housing costs. If a comparable property rents for $1,100 a month (which is about what a $200k property rents for in my area) they would have had $442 per month to invest, plus the $40,000 down payment money.

Factoring in taxes, to match the same $118,250 you would need to average a 5% return in your chosen investment. Is that doable? Probably if you're savvy. But even if you can you wouldn't have been able to enjoy living in your own home for that time. If you can make significantly more than 5% somewhere, maybe that's worth it.

I don't know about you, but I have enough of my retirement money in stocks. Owning a piece of property (whether primary residence or investment) brings an additional layer of diversity to my portfolio.

Guest's picture

Good posts. I think many people are getting a cold hard lesson in reality that a home with no equity is simply renting. Never in our history have we allowed so many people to purchase homes with such little, if anything, down. No skin in the game. Take for example the option ARM product. People were able to go 100 percent financed and have a negative equity loan. So as properties fell, their loan balance increased. We have never seen such trends in housing. And even with FHA insured loans, you are only required to put 3.5 percent down. This is too little and we are seeing default rates soar.

Until you have 10 percent equity (at least) you are simply a renter. Even if you sell assuming costs and commissions, you are looking at 3 to 5 percent going to selling your place. So after escrow closes, how much do you clear?

This idea that owning a home makes you somehow immune from economic trends is nonsense. Just look at the 300,000 and more foreclosure filings each month and ask those people how secure owning a home is. A home is a good purchase only if you can swing the payment and don't spend more than a third of your income on your monthly nut. Otherwise, you are basically buying a put option on a rental. As we now know, price appreciation is never guaranteed.

Guest's picture
Darlene

The main reason that I want to own someday is to retire. It would be pretty hard to retire and still pay full rent each month, on top of the medical bills and other normal expenses. Once you buy a home outright you can go into retirement feeling more secure. Am I right on this? I have this fear that I'll never be able to retire if I don't own a home.

Financial Samurai's picture

Owning my home is a priceless feeling that a renter will not understand until they buy. It's an amazing feeling.

I'm glad I have a rental property where someone else is paying my mortgage and giving me some cash flow.

Homeownership is not for everyone. Please have at least 30% of the value of the house in cash, so you can put 20% down and have a 10% cash buffer.

Keigu,

Financial Samurai
"Slicing Through Money's Mysteries"

Financial Samurai's picture

Real estate is not the best investment, but I have to admit I did turn a $80,000 downpayment into $330,000 after fees in 5 years after I sold a piece of property.

I think the older you get, the more you realize the benefits of homeownership.

Keigu,

Financial Samurai
"Slicing Through Money's Mysteries"

Guest's picture
Guest

I loved this post! Finally someone who has not bought in to the idea that buying a house is a good way to amass a nest egg.

I rent and love it. I pay $850 a month for an appartment and could easily rent a house for $300 more a month. I pay $500 for insurance a year. I don't pay for anything else.

I paint my walls, I drill holes, I have a garden and a huge back yard. What I don't have are a mortgage, property taxes, insurance, maintenace, etc.

In my neck of the woods, a $150,000 dollar house equals a total monthly payment of around $1500 a month. Investing the difference, $650 a month, is no doubt a better investment. For all you doubters out there, go to the NY times page and use their calculator. It proves the math time and time again.

For the person above who said that you can't get 5% a year from the market, you are wrong. There are stocks that pay dividends at twice that.

For the other person that said that owning is more secure in retirement, do you expect your maintenance, insurance and property taxes to go away after you finish paying off your house?

Guest's picture
croatian1

As a renter, I cannot believe you do not carry renter's insurance. The owner of your apartment building carries insurance, but it does not include your personal property if there were to say be a fire.

And technically you do pay property taxes: Each time you have a yearly rent increase this is to adjust to the owner's property tax bill.

You have a big yard and garden. Do you rent a private home? If not, you are sharing that big yard with the other renters. If you are renting a house what happens if it is sold or worse case scenerio, forclosed?

Guest's picture
Guest

Harrummmphhh!!!

This "real estate is a crappy investment let's buy stock" argument is the same flawed argument I rejected when my MBA-brainwashed husband tried to convince me to not use the proceeds from MY (pre-marital) vacation home to pay down the mortgage on our main house.

THANK GOD I had the "buy a house and pay it off" mantra pounded into me by my grandparents who raised me and used MY money as I saw fit ... to pay down the mortgage ... and NOT to buy stock!

Then the economy tanked, the stocks are in the toilet, but we live in a house we can afford even if one of us loses our job, our fixed mortgage interest rate is low and will be paid off within 15 years (not 30), and it doesn't cost us much more to own than to RENT a comparable house.

Try living in your stock portfolio ... or retiring and paying rent on a social security stipend. It doesn't work.

I think where Americans went wrong wasn't INVESTING in their own homes in the first place, it was buying into the whole "real estate will only go up" and "keep refinancing it and buying stock" garbage the bankers/economists/MBA drones were promoting.

Guest's picture

...and I still bought. My house cost $70,000 and my mortgage payment is $500 a month for 30 years. I plan to move in 3 years and even if I sell it for the same amount that I bought it for I will have still made money.

For one, I got a $7,000 check from the government for buying a house (it's 10% of the house value or $8,000, whichever is less). Also, I have a no down payment loan at 5.5%. My maintenance on the house is minimal as I'm not married and don't care how the house looks.

If I were renting I wouldn't have gotten $7,000 and I wouldn't be putting a bit of each mortgage payment toward the principle of the house. Even though it's only a little bit that doesn't go to interest right now, it's still more than I would be putting toward principle if I were renting which would be zero.

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Guest

Your math on the huge loss is wrong. You must subtract what you would pay in rent from what you paid in on mortgage, taxes, insurance, and maintenence. Also, take note rent usually raises every single year! Factor in moving expenses as the complex will go downhill and you need to move in that ten years to some place even more expensive. The owning is not such a loosing proposition. At the end of the day you are correct, a house is a home not an investment if you live in it but you do not need to twist numbers to prove this.

Will housing rebound, of course it will. To traditional growth levels, it is a cyclical event. Of course if the stock market crashes I expect that article from you about how stock is a horrible investment.

Guest's picture

such as your landlord can be a complete whack-job, insist you pay for repairs on their property, decide they want to move back into their own property and ask you to leave with no more than a 30-day notice. In my area, monthly rent is about the same as a mortgage payment, and my home city has historically rode that housing bubble roller coaster more than once (with some people making tons of cash on the sale of their home). So I think the whole rent vs. own dilemma depends entirely on where you live.

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Deb

I think when it comes to home ownership, common sense needs to prevail. Too many people forgot all about common sense over the past several years, and greed took over

We bought a 950 sq ft fixer of a home, but it's on 4 acres in an excellent area that is growing - it's the land that's valuable, the home is marginal. As DIY'ers, we believe strongly in sweat equity. We kept our former home as a rental, and we make a small monthly cash flow while that tenant builds our equity. We're able to do virtually all repairs ourselves. Sounds sensible to us, but some of our friends scoffed and teased us for such drastic downsizing, and for choosing a fixer home in an area that's a bit more rural than suburban.

Many people we know went the other direction - purchased large McMansions in the burbs, sunk every dime into their granite countertops and oversized bathrooms & big stone fireplaces, and were certain they would become rich from that single investment when they flipped that house in just a year or two. Now those friends are sitting on homes they can't sell, are struggling with large mortgages they are upside down on, and some of their jobs have disappeared. Meanwhile, our monthly mortgage for our home and 4 acres is just 15% of our gross income. We love working on our modest home improvement projects, and we're able to continue maxing out our other retirement contributions.

I believe that real estate, when done RIGHT, can be a good addition to an investment portfolio. A home can absolutely be a sound investment when decisions are made rationally. I purchased my rental home in '98 for $129k. The previous owners purchased it in '76 for $26k. Even in the down market, that rental is now worth $210k. And now, someone else is paying down the mortgage on a home that I still love so much that I may move back into someday. What's not to love?

Guest's picture

Absolutely love the picture at the beginning of the post Brandon. Was it meant to be quicksand?
The so called property gurus dream up numbers and push them around so heavily people are lulled into believing they're correct.
For example, Your house will double in value every ten years. Most people go WOW failing to realise that in reality this is a lousy 7% growth which is not far above the cost of money.
however for so many people something is better than nothing and when you spend every cent you have and can't save, a house can be a form of compulsory saving.
Maybe the dream was designed by the banks to have something solid to lend against because as house prices increase the banks get a volume increase in their business by offering more debt to support living beyond your means

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Jake @ DC

I think a lot of this depends on your goals and what you want to accomplish. The post made it clear that a house as an investment may not be as good of an idea as most people think, but the fact that you own the house wasn't really taken into consideration.

If your goal is to invest lots of money and strive for the best return possible, and are willing to live your life subject to the sometimes unreasonable whims of a landlord, then renting may be the way to go.

If you're more concerned with owning your own place and doing whatever you want with it, then renting probably isn't for you. Of course, there are so many other things to consider, such as how big your family is, where you want to raise your kids, the level of privacy afforded by renting an apartment vs. owning a home... it all depends on the situation and what you're goal is.

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Guest

I agree that homeownership is not a cure all, it's not the greatest investment, but it's better than some, don't talk to me about the stock market as an alternative! That just doesn't hold water (talk about price volatility!).

I believe you should live in the smallest and cheapest house you can manage. Take your extra money (that you have from living in a smaller house) and invest it. Stay there, don't move around every five years, if you move often the realtors make money not you!

Yes there are alot of hidden costs in owning. I bought a huge house, lived there for 15 years, when my kids graduated high school I sold it and moved into a smaller place. Now I save up the difference. I would have been better of renting in the first place. But hey, live and learn.

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J.D. Roth

Though this article is provocative, I don't disagree with it. And while it's great that the author cited sources, I'm baffled as to why there are no links to them. I'm googling to get the raw info, but I'd love to see some of the original articles. What about the Motley Fool piece regarding an "expense ratio" for owning a home, for example. That sounds interesting.

Why just a textdump without any links?

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Guest

Every time I hear someone yapping about leverage it makes me sick. Sure, you have a lot of leverage when you buy a house. What everyone seems to forget is that leverage is a two way street. When you buy a 200k home and it drops 10%, you now are $20,000 in debt for the house you "own".

And what's with all the people with crabby landlords? I've rented for 12 years and have yet to have the ruthless dictator landlords mentioned above.

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Micahel

The article is pure genius and perfectly reflects what I've said ad infinitum for years. His logic and rationale completely destroy all Realtor related non sequitur arguments about why owning a home is an 'investment' or any other fallacious arguments about why "now is always a good time to buy"

The author uses financial examples to show the realities of home ownership which are solid and realistic.

Take notes people. A house is NOT an investment. It's simply a place to live. It ties you down in ways you cannot imagine. It puts you at the mercy of local employers, local schools, property taxes, and local economics.

This article is every Realtors worst nightmare.