Though home prices across much of the nation have recovered their pre-crash levels, the volume of transactions is still less than half what it was at the peak of the boom, and still well below historical norms. The number of new home transaction is still hovering near historic lows. Analysts are starting to ask whether home ownership retains its traditional place as an element of the American Dream.
Should young people who have shied away from home investments be considering a purchase? It depends.
Measured in straightforward math, home ownership is a money-losing proposition. With the exception of the period from 2004-2007, all the fabulous stories you’ve heard about the money made from an “investment” in a home are pure garbage. People are as good at evaluating the merits of their homes as they are at judging their kids’ talent.
When people evaluate the performance of their home in investment terms, they subtract the sales price from the purchase price and pat themselves on the back. Occasionally they will incorporate the cost of the kitchen renovation, or a selected portion of that cost, but they will almost never account for all the cost of ownership. The ledger will magically fail to include the new water heater, lawn maintenance, the endless minor repairs, or the time devoted to upkeep. They will not incorporate the additional travel costs or time incurred because they had to live fifteen minutes farther from everything in order to find a place they could afford.
More importantly, they will fail to evaluate the opportunity cost of the investment or the cost of the lost alternatives. Across hundreds of years, real estate gains a fairly steady .5-2% above inflation. If prices move much higher or lower over a short term period you need to brace for a correction. By contrast, that same money placed in an equity investment can reliably earn two to three times as much. That lost opportunity will not make it into the ledger.
For those looking for “new buyers” entering the market to take prices back to boom levels, it’s time for a little sobriety. The only reason prices spiked in the last decade was because clever monkeys on Wall Street found a way to engineer a brief boom, using the mass securitization of the mortgage market to convert housing into high-octane Ponzi scheme. There is no mass of new buyers out there waiting to enter the market. The basic demographics of the country are heading in the opposite direction.
Population growth has largely stalled with the exception of new immigrants. Changes in the way the economy works means people who will earn enough to support home ownership start their careers and their families much later in life than before, meaning that their span of homeownership comes later and is often shorter than in the past. And growing inequality means that fewer and fewer young people today will ever be homeowners at any price.
The real estate boom is not coming back. Home price appreciation can be expected to stabilize back down around the low end of its historical norm
And the tax benefits of home ownership? That may be the cruelest hoax, especially for middle-earners. Even at the highest tax brackets, the savings are far less than you would expect. Very few Americans realize how little they spend in Federal income taxes or how much they spend comparatively in property taxes. In exchange for taking on a new property tax obligation, a middle earning taxpayer will get perhaps as much as a 6-10% discount on the interest they pay on their mortgage. With interest rates on new mortgages running in the 4% range, that’s not very helpful.
Home ownership is far more expensive than almost anyone realizes. As an investment it under-performs almost any available option, including treasury bonds. In a radically dynamic economy, it makes movement to pursue new job opportunities sometimes prohibitively expensive, tightening career options. Worst of all, it creates a fixed burden on young families that does not flex with changing financial conditions.
And for a lot of people buying a home is a pretty good idea. Here’s why.
The benefits are not entirely financial. A home should not be treated like an investment in the purest sense, though over time it will tend to have some stabilizing effects on a family’s finances. The main value obtained from home ownership has to do with the relative shape of the markets for single family homes as compared to rental properties and the social impact of ownership on families and communities.
First, there is some minor financial advantage to home ownership that helps offset some of the costs. The impact is not enough to convert ownership into an investment, but it does make it attractive overall when all the factors are calculated.
Home ownership based on a fixed-mortgage, the most common method in US markets, converts a home into a form of inflation hedge. If a homeowner follows the model pattern, purchasing a “starter” home around the time of marriage, then stepping up to “stretch” home at early career, they set in motion a process that could see their housing costs drop steeply below the cost of a lease or rental over time.
As inflation proceeds and their income (presumably) rises across the arc of a career, their mortgage cost remains flat while leasing costs rise with inflation. By about the ten year mark, their housing costs are perhaps a third of what they would be if they were still leasing. From about that point forward, they also begin to accumulate equity in the home which can be converted very cheaply into capital.
That rosy investment scenario requires a lot of uncertain variables to fall in a family’s favor. Divorce, for example, takes that promise of a long term benefit and converts it into a costly loss that often follows the family for many years. A job loss or transfer complicates the picture. And if income does not rise the effect is dimmed. That said, this is a plausible scenario that has brought meaningful financial advantages to a lot of families.
Perhaps the most persuasive reason for home ownership, the one that provides the decisive factor that trumps all else, is the way the housing market is bent toward ownership. The rental market in the US offers virtually no options to rent single family homes with the kind of predictable quality you would expect from a corporate product.
The rental market is volatile. The quality of landlords is highly variable and almost entirely unpredictable. That makes the prospect of a long-term lease very unsettling, but families at mid-career with young children face tremendous costs when forced to move. Decent rentals are hard to find and you often can’t identify whether you have a good or a lousy rental until you’ve moved in and experienced your first maintenance problem.
In short, the rental market for families is unstable, unpredictable, and far too dynamic for families to absorb. A rental may, in principle, provide some savings over ownership, but it is just as much of a gamble.
This could change. A very substantial portion of single family home purchases since the collapse have involved hedge funds. Many of those funds expected to “flip” the homes when market conditions improved, but the improvements they were expecting have not materialized. If a new market for corporate-quality, branded rentals emerges from the crash then this dynamic might change. If that happens, then the economics around home ownership might shift decisively in favor of renting.
Absent such a shift, home ownership is likely to remain an expensive, but necessary investment for young families.
reckon Obama is going to read a newspaper and find out about another scandal tonight?
I have honestly wondered if he might not be our first president with an internet addiction. He is just the right age, young enough, and president at just the right time in tech history. No one is immune.
I will never think of my home as a mere investment. It is part and parcel of me, intertwined with my identity. It is my sanctuary, my personal and private space, into which no one can enter without my permission. I would go down fighting to protect it. Gentrification and eminent domain be damned.
Tutta, I suppose it’s a good thing you weren’t living in New Orleans during Katrina. FEMA and the New Orleans PD had apparently never heard of the 4th Amendment. It’s also apparently a really good thing you weren’t living in Boston during last year’s Boston Marathon. Again, local authorities seemed to suffer selective amnesia regarding the 4th Amendment. It’s probably also a good thing you aren’t a Nevada cattle rancher operating in the realm of the desert tortoise. And it’s a good thing you weren’t a religious cultist living in Waco in 1993. Or a separatist with a homestead on Ruby Ridge in 1992.
I could go on and on, but I trust you catch my drift. Play it safe. *Conform*.
No, we will not be assimilated. Resistance is not futile. 🙂
Ready, aim, FIRE THE PINK FLAMINGO. At retirement we want to have rooms of our own, a neighborhood of charm opposed to uniformity. We probably won’t find it here, but the big city overwhelms us and we are just surviving it until we can set out on a new course. This new course hopefully will include friends and neighbors in the 3d world outside of this 2d life online. I do hope the future of our country includes eminent domain as something which is studied only as an historical fact. No more 8 lane highways or tubes of goop running under the property line.
Crogged, that’s a beautiful aspiration. You do recognize, I suppose, that supporting the policies of the current administration, which are generally conducive to increased governmental power, is not compatible with your dream.
Of course, the republicrats are generally no better; it’s just a different set of cronies with them. Which leads one inexorably to the conclusion that the only solution is a government which is too limited (i.e., small) to partake of such shenanigans. Hmm.
Tutt wrote”I would go down fighting to protect it. Gentrification and eminent domain be damned”
I agree Tutt. Yet lots of folks have no problem with Keystone pipeline taking farmland and property.
I agree Tracy, but I am agreeing with Tutt’s point which is directly tied to this post. Having your own space is quite liberating. We have the HOA, but they only want what I want, keeping the neighborhood looking good.
I’m glad my neighborhood has no HOA.
I can’t let Tara go. I won’t let it go while there’s a breath left in my body. ~ Scarlett O’Hara
Tutt, your post is a great example of how identity and strong emotions can be tied to home ownership. That is certainly huge factor and trumps economics for many people.
As for myself, I love my Spanish-style home with its red-tiled roof and its beautiful view of the mesas in the distance. But … if my husband called to say that we were being transferred someplace cool, I would happily start packing and calling moving companies.
Maybe, I’ve had to move too many times for me to be tied to one place. As long as I know my family members are safe and happy, I’m happy too.
Well, when you raised your children in the home and the grandchildren come to visit you in the home, and the many parties that we hosted in this home, it does have an emotional attachment.
The attachment is also economic. Why incur new debt when your house is paid for? The feeling of security is priceless.
OV, I also thought of Scarlett’s attachment to Tara. After I posted my comment, It struck me as over the top.
Tutt, I didn’t take your post as over the top …. but if you start sewing your curtains into ball gowns, you may have a problem. 🙂
Kabuzz, I’ll admit that I don’t have many memories connected with my home – that’s probably why it would be so easy to relocate.
We are at a place in our lives where we are looking for a place to settle/retire. I want a condo set up so all we have to do is take care of our living space. My wife is for it but she also wants to be by water. Anyway, it is a big decision but the right one will happen.
“I saw this dress in the window and couldn’t resist.” Scarlet O’Hara. (Carol Burnett)
I guess Scarlett was the ultimate recycler. 🙂
Kabuzz, Tutt and I are always talking about where we might live when we retire as we travel around the state. So far it seems like East Texas between the Crockett and Tyler areas.
“Across hundreds of years, real estate gains a fairly steady .5-2% above inflation… By contrast, that same money placed in an equity investment can reliably earn two to three times as much.”
Indeed. And assuming your spouse and offspring are content to live in a tent under an overpass, there is no need to direct income towards housing rather than the equities market. Now, on the off chance that your spouse has let it be known that the tent is *not* an option, you need to ask yourself a question: Does it make more sense to rent, or to buy? This answer to this question is found in the answer to a second, related question: If you rent, do you suppose your landlord is in business to lose money?
No, most homes are not high-performing investments. However, home ownership is generally preferable to pounding your money down that rat hole called rent. Just don’t buy more house than you need, and then try to salve your conscience by pretending it’s an ‘investment.’
“Just don’t buy more house than you need, and then try to salve your conscience by pretending it’s an ‘investment.”
tthor, that’s the best advice of all.
That’s right, objv. Spare dollars should *always* be directed to the latest swoopy two-wheeled conveyance. 😉
tthor, I see that you and my husband must be kindred spirits. My husband just brought home a 1974 Yamaha dirt bike for my son a couple days ago. They are trying to get it running. I predict many happy hours spent on restoration.
Speaking of living in a tent, my son will be doing that for five weeks this summer on geology field camp. Do you recommend me wearing a hazmet suit to greet him when he comes back? I understand shower opportunities will be limited.
“Don’t buy more house than you need..” Great advice, you’ll just have to fill it up with even more crap that you don’t need. All that stuff will just weigh you down.
Great article, Chris. Very balanced. I laughed out loud at “People are as good at evaluating the merits of their homes as they are at judging their kids’ talent.” (I was in utter disbelief this past weekend when my son wasn’t selected for his baseball league’s All-Star team!)
Fortunately, I’ve had financial success with my home investment. However, you said in your article that “the benefits are not entirely financial” and for me, perhaps the more important aspects of owning a single-family house have been the privacy, space/backyard (I have two young boys), sense of ownership and other elements that make it a “home.”
Our house is a modest, single story 3-bedroom, 2-bath; built in the 60’s, but maintained and renovated. The balance of the neighborhood’s population is shifting from original owners to young families (like many urban neighborhoods near the Med Center). Any time my kids return from visiting the palatial home of one of their more affluent friends, I ask them if they’d rather live in a bigger, nicer house. They always reply ‘no,’ that they love our house the best. Also, if my wife and I ever talk about moving, they get upset.
Indeed, the benefits are not entirely financial.
I would like to add that an even more important piece of this puzzle is one’s choice of partner in marriage. A bad choice there won’t make up for buying that cheap little starter in the Heights or University Place twenty five years ago……………choose even more carefully in marriage and/or partnership and make sure you each have agreed to a vision of the future.
Whoa! Ain’t that the truth! Chris need do do a piece on the ‘changing economics of marriage’!
Yes, fifty, and as with houses, the benefits are not entirely financial.
The economics of marriage would be a great subject to discuss.
I might begin to feel a bit guilty asking DanMa’am to take on another job to allow me to expand upon the lifestyle that I have become accustomed to. As Obama alludes, I believe I have enough.
(And without typos this time, “Chris need do do”…)
They aren’t indeed. Wouldn’t trade a second of it!
And Dan- Now you’re not a ‘kept man’, are ya? 😉
fifty: We can always hijack the thread ….
not in the traditional sense fifty but yeah, I’ve got it good
DanMan: My husband would be jealous. He longs to be a kept man. Unfortunately, my role has mainly been decorative lately.
It can be a struggle. Between her three jobs, the laundrycookinghousekeeping and what not she barely has time to tend to me. Sometimes it wears me out to see her run around like that.
DanMan, that’s tough. Unfortunately, it’s a situation all of us trophy wives/husbands are in. Try not to feel too bad about it.
thanks, any support is most humbly appreciated
I see OV is posting cats and dogs now.
When post with my kindle, it takes over as if possessed. It thinks your name should be either Tuft or Isabella.
I don’t see the change in avatars. I’ve tried to bring the cat back.
So is it raining cats and dogs, or is it the quote from Ghostbusters, “Dogs and cats living together” end of the world stuff?
OV I also see some of your comments having the cat and some having the dog. Tutt sometimes gets the Tuttabella name and sometimes the Tuttabellamia name. Not sure how all that works. My avatars are more straight forward, I get the Captain Sternn avatar when I am at home, the generic avatar when I am not at home. I don’t log into WordPress from computers I don’t own.
Great article as always.
One point that I don’t believe was brought up though is that renters are often forced to absorb many of the costs of ownership that the landlord bears but they get none of the benefits (which you described). This means that the price the landlord pays for property taxes, maintenance, etc. are all included in the monthly rental price.
Better be included or your landlord is the dumbest guy in town.
In my old Spring Branch neighborhood, homes have become a form of inherited wealth for some.
Most of the people who built the homes in the 50s have died or moved on, but a few left their homes to their children, who continued to live in them for years.
Today at least two of ‘children’ have their homes for sale. The houses are built on very big lots and it’s likely the sale prices would astonish the people who built them in the first place, even though the actual buildings could be replaced by pseudo mansions.
Also, depending upon your age, and other things, the possibility of a reverse mortgage to tide you over until death is not a horrible thought if one’s financial resources are zeroed out.
When I bought the my beach house as a second home, I had it for 8 years and sold it for 150% mark up. Deducted all the repairs and such we made out great.
The home we have lived in for a long time is now worth 3 times what we paid in.
Home ownership demonstrates commitment to employers and bankers. It gives you privacy and for me there is something great about owning a peace of land in America.
Now that I am retired and my wife is considering it, we are looking for our next stage of life. When I was discharged from the Navy in Seattle, I chose to take my flight pay and drive back to Pa. in my Voltswagon bug. It took me a year and a half to get home but what a journey. I would like to do that again as the Captain has an urge, but my love isn’t for it, at all. She wants the luxury of flight and hotel rooms when we travel. I keep trying to convince her how exciting it is to meet new people in places we’ve never been before. So, I don’t know who is going to win this one, but it isn’t looking good for me. 😉
Ah, a Navy man. That explains pretty much *everything*, Kabuzz.
When my youngest, currently a Seahawk pilot out of Jacksonville NAS, graduated from Annapolis, I asked him how it felt to be (relatively) free at last. He replied, “Pa, the Navy’s done things to me… bad things…” I’m pretty sure I could eat off the poor kid’s garage floor; it’s that spotless. Then again, he gets to fly around backwards when the mood strikes him. 😉
TThor, the military does things to a person. The goal of the military is to tear a person down, then rebuild them. They do not succeed with all of us, but it does change a person.
The Army did not tear me down, but it made me understand things in a different light. I was an entitlement minded teen and became a self reliant adult. It wasn’t just the military that did it to me, it was also seeing how well my parents were financially better off without me.
I learned other things as well. Those things would be better left for other discussions. Let us just leave it at I have several firearms and a CHL. My constitutional learning came much later, and that only reinforced my understanding and beliefs.
We have an investment group focusing on “corporate-quality” rentals targeting my small 5 year old neighborhood. They offer a cash asking price+ to seal the deal and charge about a grand over the average mortgage payment. The investment group will likely see 100% return on their initial investment in 7 years of rental payments and still have a couple of years before costly maintenance is required. While I can see how this arrangement is profitible for the investor along with the seller, the renter is paying a $1000 extra a month for a low maintenance home without the benefits of tax deductions and accrued equity. Where is the savings that would allow the renter to invest in other profitable alternatives?
Intrigued: My husband and I have had to rent a house in California and an apartment in New Jersey (at home rental price) due to my husband being on temporary assignments.
In our case, the company my husband worked for didn’t want to pay all the associated costs of buying a home in California since we were only going to be there for 18 months. (We were headed to Venezuela after design work in CA was completed.) It turned out well for us since we sold our house in Houston and per diem payments covered both rent and food.
My husband was also on a temporary assignment in New Jersey where he also received per diem, but we maintained our home in Houston. This didn’t turn out nearly as well financially although we may have come out slightly ahead since my husband didn’t eat out and so he saved on the per diem amount allotted for food.
We once had neighbors who were renting. In their case, they weren’t sure if they were going to stay in Houston. They also had a special needs child and had to carefully evaluate school programs. It made sense for the to rent for a year.
In another case, a friend of mine was living in an extremely nice area of Houston but across the street it was oblivious that more than one family had taken up residence in a rental house. This caused a real mess with many cars parked in the street and people coming and going at all times.
So far we have been lucky as they seem very nice and maintain the rental properties. The majority of the renters appear to be early 60’s, possibly preparing for retirement. I can see how renting in a temporary situation is a better decision than buying but for long term investment purposes buying beats renting in almost every case I can think of aside from job loss in a market crash.
I agree with you there, Intrigued. We bought our current house with the intent to stay there long term.
That said, renting while on temporary or overseas assignments ended up being a fun experience. Normally, my husband and I spend quite a bit of our time doing yard work and home improvement projects. Renting provided a nice break where we spent more time traveling and doing things with our kids.
For example, renting our small home in California ended up being a blast. There was no yard work or maintenance so we spent most evenings doing a recreational activity like going to a park. Instead of the usual 1 1/2 hours spent mowing and doing yard work on Saturday mornings, we could pack up the kids and head for Disneyland, Sea World, or the San Diego Zoo. We hadn’t realized how much time we spent on house related work until we were free from all of that.
I can see how renting might be more appealing to some families or couples where they would like the freedom to travel or move to a new location without the hassle of trying to sell a house.
Believe it or not …. the real estate agent we had when selling our last house in Houston said that landlords are encountering this problem – even in very nice neighborhoods.
I guess it is a good thing that I never thought of my home as an investment in the sense that you describe. I pre-qualified for 5 times more than I spent on my house but because of job insecurity I chose to buy a home who’s payments would be no more than 40% of my lowest wage in the previous 5 years. The lowest interest payment you could get at the time was 7.125% on a 30 year fixed. I still had my youngest daughter at home so my criteria for my home was pretty simple, it needed to be close to school, no more than 10 minutes or so from my job, convenient to shopping and medical care and in a relatively crime free neighborhood. I also wanted a home for which I could enjoy a certain amount of privacy and would be relatively easy to maintain.
The plus side is that in 20 plus years my homes value has more than doubled but even with the upgrades I will still be in the hole if I were to compare it to other investments I have made.
From my experience I would have to say that if you were going to buy a home as an investment the only way you will see any return on your investment is to pay cash for it.
Interesting Sassy. When we bought our first house in 1999, FHA loans were so strict we only qualified for a a mortgage payment no greater than 1/4 of our monthly income. When we bought our second house in 2008, with a 20% down payment, we qualified for a conventional loan 3x the amount we paid for our house or about 1/2 of our monthly income. I still think the 1/4 monthly income is a great rule of thumb for buying a house, if at all possible.
Mine was at 25% of my “current” wage as well. My lowest wage prior to my purchase wasn’t much over minimum and I was going to school part time and working 1 full time and 1 part time job. I also knew that if I set my budget based on my lowest years wages I would be able to pay my bills if my higher paid job fell through.
Well, Lifer, interesting entry. There were many issues with the housing boom and the causes behind it, many political. The “gambling” of the banks trying to cover what the federal government was demanding, and the repeal of the Glass-Stegall Act to allow that gambling, the push to eliminate redlining, all led to the boom and eventual bust. The bust was as inevitable as the dot com crash. Since you didn’t get political and take jabs at the tea party, I will leave politics out as well.
You make some great points on how owning is different from renting or leasing. When renting or leasing, one is paying the equivilant of a mortgage, home owner’s insurance and property taxes but with nothing to ever show for it.
I came very close to buying a new home back in 2003. It would either have been a home built on my property or a double-wide mobile home. The price was going to be around $100k to $130k, and my property, cleanly owned, would have been tied into the collateral. I ended up writing off building and got serious about the mbile home, but the rpice kept going up and the original demands of mine kept falling to the side. The real killer came when I was told no custom home, just take what was on the lot, and then doing the math. A $100k trailer was going to actually cost me over $300k over 30 years. One can cut that down to 15 years by making one extra payment per years. But still …
In the end I walked away, added a master bedroom to my existing structure and had no liens. Good thing too, because just over a year later I lost my job. I would have lost everything, including the land that I owned outright.
Now there is one other form of home ownership combined with renting or owning land to park it, one that I experienced for a little over two years (aside from owning my home and property outright, which I did not give up or sell), and that is RV living. It probably wouldn’t be a good idea for a family, though I have some relatives that did that with a large family and toured the nation while home schooling their kids, The tour was part of their education. But it can be a viable option for single people or couples without kids, or kids that have grown and moved out.
RVs can run from a couple thousand used to, well, unlimited new. I saw many retired couples in quater million dollar buses with a $50k tow vehicle to very poor people that worked as little as possible not on welfare to people that were on welfare and disability, all ranges.
I was very serious about moving into that lifestyle when I retired, but that was when I was alone and before I met my dear lady. We have discussed it, and it may still be an option some day, but not an almost certain thing as it was before I met her.
I am guessing there are other options that I haven’t even considered or currently know about. As Tutt might say, think outside the box. Or in this case, maybe consider other types of boxes (homes).
Speaking of homes and boxes . . . some people do live in shipping containers.
Some of them are pretty darn fancy too!
We had a travel trailer as our vacation home. Let’s just say we should have invested in a structure that did not self disintegrate when something as small as a leaky window occurred. It’s a great lifestyle that you have to love so much that throwing your money out the window is more than worth it 🙂
Correction, Chris: in paragraph 6, you should say “Ponzi scheme” rather than “ponzy scheme”. It’s an eponym, not a regular adjective.
Exactly correct. The enonymous Charles Ponzi, (b. 1882, d. 1949), was the first administrator of the Social Security Administration.
ahh there you go…feel better now?
I love it! Heh, heh, heh…
I guess I was lucky. I was taught your primary residence should not be considered an investment. When I bought my first house I wanted to make it a 15 year loan to force myself to pay it off quicker and save the 0.5% to 1% in interest that was available on the shorter term. My dad explained the 30 year was the better option because it gave me more flexibility. He said make the same payment a 15 year note required unless things got dicey.
Things got dicey a few times and his advice was well received. Ultimately I paid that house off in 17 years though and saved a lot of money by doing so. There are few things more liberating that not having to write a mortgage check.
But to expect a house to be an investment without considering its marginal value for the necessity of having a place to stay is to ignore the lessons in the first week of Economics101.
Another very interesting notion I picked up several years ago was the maintenance costs of home ownership. The discussion centered on the expected cost should be in the 1-2% range annually vs. the purchase price over the long term. In the 1980’s we saw the explosion of pre-fab housing hit the market and they were finding the families purchasing those were seeing much higher maintenance costs that were getting upwards of 6-8% and it was having impacts on the entire neighborhoods when several homes were not maintained.
I mentioned before I was one of those kids that performed those jobs we are told Americans don’t do any more. I was a house framer for about 5 years. I like living in an older house that I can change to suit my desires and I enjoy opening up rooms, remodeling stuff and updating things for efficiency.
btw, housing prices in just about any neighborhood inside the Beltway in Houston have absolutely skyrocketed in the past 2-3 years. I am stunned at the current values of houses in the older neighborhoods and it is nice to see these old areas blossom with new families. Eastside is transforming back to middle class, the Heights is upper middle class to wealthy now. Riverside is taking off like a rocket as the rising tax rates force the vacant lot and rental properties owners to sell.