The ongoing housing crisis and precipitous fall of home values has financial experts questioning the long-term value of buying/owning a home. This firmly held belief of both financial planners and ordinary citizens has been backed by a century’s worth of economic data, but new numbers have challenged the pedestal on which home ownership has been placed. Indeed, with the new economic realities that have appeared in the past year, from exploding deficits to unprecedented government intervention, the question should be asked: Is buying/owning a home still a good investment?
The Wall Street Journal, Jim Cramer, and Home Values
At the forefront of this new, opposing view is the Wall Street Journal, which recently calculated that the return on owning a home was only 1.15% a year above inflation since 1987 (recent housing boom) and 2.2% a year above inflation since 1994 (recent housing bust). These numbers represent the change in the Case-Shiller Index of 10 major cities. Yet, even if the appreciation of the home doesn’t offset the interest of the mortgage, the imputed value (living rent-free) still makes for a solid investment for owners who live in the home. Often, this imputed value alone can equal 4-8% of the value of the home (although not the total amount of the mortgage) each year. The WSJ article mentions this point, but doesn’t emphasize it, and seems to speak more to people who would buy a home as investment property.
At the opposite end of this spectrum is Jim Cramer, who recently declared that it was “patently obvious” the housing bottom had arrived. Of course, Cramer’s bent is distinctly more short-term than the analysis from the WSJ, but if the housing market has hit bottom (a historic bottom, perhaps), it takes some of the teeth out of the WSJ’s analysis.
Homeownership vs. Renting/Stock Market
The investment value of owning a home can be seen through two common—and very different—scenarios. First, in terms of getting a return on capital, should someone invest in real estate, the stock market, or some other investment opportunity? Second, in terms of planning for retirement, should someone rent or own a home? Unsurprisingly, many investments show poor returns right now, even when looked at over a period of 10 to 15 years. Moreover, most financial advisers would probably tell you that, while both the housing and stock market have large upsides right now, the housing market is probably the safer of the two options right now. After all, while Cramer is unequivocally declaring the bottom of the housing market, many Wall Street analysts are still calling the recent surge a bear-market rally. Moreover, a real estate investor has the entire country to scour, looking for deals and upside. Thus, anyone wishing to invest capital in the real estate market will probably find a better return than the national average, comprised mainly by owner-occupied homes.
What’s interesting about the debate between owning and renting a home is the narrowing gap between the monthly costs. In 2003, the average monthly rent payment was $651, while the average monthly mortgage payment (including home maintenance costs) was only $758, according to the Census Bureau’s American Housing Survey. By 2007, at the tail end of the housing bubble, this gap had ballooned to a $755 average rent payment and a $972 average mortgage payment. The housing bust has undoubtedly narrowed this gap again. In fact, in some areas where home prices have been hit hardest and while interest rates remain reasonable, monthly mortgage payments are now lower than monthly rent payments. Thus, with nearly equivalent costs to renting, owning a home becomes a no-brainer and any equity you build over the years is simply icing on the cake.
Why It’s Important to Ask the Question
Although the Wall Street Journal‘s analysis isn’t convincing to most people, it does at least make people aware that their specific home purchase is no guarantee of a financial windfall. Indeed, the unquestioned value of buying a home likely contributed to the haphazard, no-worry stance of home-buyers who ignored or shrugged-off the unfavorable terms of sub-prime mortgages.
Likewise, Jim Cramer’s pontifications don’t mention the fundamentals of wise home-buying and ownership that can make the difference in real estate investment, even during the peaks of buyer’s and seller’s markets. Passing on the most expensive home on the block, avoiding a bidding war, finding a home in good condition, seeking out multiple lending institutions and loan terms, and, in general, looking for value in your real estate purchase are all pivotal for the long-term return on your property, not to mention staying above water in terms of equity.
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