Homeownership: a piggy bank investment
loading...
loading...
This article critiques the popularly held notion that homeownership is a lucrative investment.
A tale of two dollars
It should come as no surprise in the current economic climate to hear that a professor of economics does not consider a home purchase to be a lucrative investment. But the assertion that purchasing a single family residence (SFR) has never been a sound investment could come as a shock to a nation that has always believed in the myriad virtues of homeownership — not the least of which has been the idea that if all else fails a profit may be turned by selling their home.
Robert Bridges, a professor of economics at the University of Southern California, points out that between 1980 and 2010, the value of a mid-tier SFR in California increased by an average of 3.6% per year, from $99,550 to $296,820, not much greater than the rate of consumer inflation. Thus, even those mid-tier California homes that were sold during the most recent market peak in 2007 show a moderate average annual price growth of 6.61%.
A comparison of the appreciation between a dollar invested in California housing versus the same dollar invested in the Dow Jones Industrial Index (the Dow) is quite revealing in terms of the viability of the relative investments. Given the average annual price growth of mid-tier California housing, one dollar invested in the California housing market would have grown to a peak value of $5.63 in 2007 and to $2.98 in 2010. The same dollar invested in the Dow, which to some extent ran in tandem with the vicissitudes of the California housing market, would have been worth $14.41 in 2007 and $11.49 in 2010.
End of free preview
The rest of this content is only available to first tuesday Members. If you are a current first tuesday Member, please login above.
Not a current Member? For only $29.50, our Annual Membership includes access to:
- the first tuesday journal;
- over 350 first tuesday real estate forms;
- over 35 FARM letters; and
- a 16-book reference library and more!
To sign up, visit firsttuesday.us!
loading...
loading...
About The Author
Jeffery Marino
is an assistant editor and lead on our first tuesday news alerts, specializing in critical economic analysis and its impact on California’s real estate market.
Let’s review the ‘facts’ one more time:
If you buy a home and it rises not one penny more than inflation over thirty years, then inflation is “neutral”. But a hedge that keeps pace with inflation is hardly neutral compared to not keeping pace. Most stock market investors are unable to stay the course and sell at the wrong time – and lose money. Some hedge that is! But the index sure look good, huh!
If you pay not one penny more on the mortgage and expenses than rent would be on the same house, then living expenses are neutral. But mortgage interest and property taxes are tax-deductible, and currently LESS than rent on the same house even before taxes are considered.
If the house is finally paid off and then is either:
a) rented for rising income or
b) lived in without a mortgage payment, and
c) continues to hedge for inflation either way.
Then:
You don’t think owning is a more effective long term investment vs renting?
You don’t think having rising equity beats having no equity?
You don’t think a fixed mortgage followed by no mortgage is better than endlessly rising rents, as debased paper currency always leads to???
You don’t think advising a buyer’s strike, when prices and interest rates are at their lowest point, is against a young person’s interests?
You don’t think the agents who make up your clientele disagree with your analysis, or else they’d leave the business? In fact, thanks for encouraging these defections. It will help my business. Will it help yours?
I need to remain open to viewpoints unfavorable to my interests, and my clients’ interests. But such viewpoints first need to survive a reality check.
The current Seller’s Armageddon is simultaneously the best Buyer’s market perhaps ever. To pretend otherwise when prices have dropped to 25% of what they were in some places, while rents have gone UP…is uneducated. A glaring red flag coming from a continuing education organization.
Why would you NOT emphasize the few positives the industry does have to your beleaguered client base??
I can’t emphasize enough how refreshing many of the 1st Tuesday articles are, including ones I disagree with part of. But on this paramount issue of the value to buyers of buying at THESE prices and THESE rates, you cannot afford to be among the lumpen uneducated. Provided, of course, that people obtain FIXED mortgages at payments within their means and forget the word REFINANCE. A home is NOT a piggy bank.
The ethical agent earns an ethical commission by getting buyers into these houses subject to the above terms. If you want to be on a pulpit, THAT is the right pulpit to mount.
loading...
You can call it as you may want, the fact that we all need a roof over our heads beats anything… And let alone if you do buy a property, after you pay it off you may get at least some of your money back… Anyone is entitled to do what they want with their money, be aware of all the ” good intentions” out there…you don’t need a financial degree to understand that you need to buy when the prices are lower than the rent…
loading...
The authors of these articles have never worked a day in real estate or finance — they just write about it from a third-party perspective.
loading...
Bravo to Rob Arnold for his excellent, detailed report and to the rest of the people responding to this article.
My comments are more anecdotical in nature and come from the words of my Mother. She was a young adult during the Great Depression and often told me later in life that the people who were able to hold onto their homes during that time were the one’s considered wealthy when it was over. She had a special fondness for real estate and purchased various rentals even though she wasn’t wealthy. Most of her properties were “fixers” because that’s all she could afford. She bought over time (called dollar cost averaging in investing lingo) and rented them out. Maybe it’s in the blood because I’ve always had an interest in buying rental properties–over time. Thanks to my purchases I was able to retire before I was 60. My mother peacefully passed away recently following a wonderful life and I became the beneficiary of her real estate investments.
The question you posed in your title of “home ownership” as an “investment” was a little confusing to me as opposed to “real estate” as an “investment.” But the elements (long term appreciation, ability to generate income, owning an actual asset-a commodity if you will) doesn’t change if the real estate is rented or owner occupied. In fact, that’s an additional option over stocks and bonds–you can’t live in a stock.
loading...