Is A Home Ever a Good Investment?

Two posts this week (here and here) about renting vs. owning have generated lots of lively commentary on the blog. Many commenters agreed that renting is wise in a down market, but not in the long run. I was struck by what commenter Ron had to say: “I do think in the majority of situations, buying a home is the wiser financial decision.”

I think it’s in our heads that buying a home is a good investment. But is it possible that homes were a good investment for our parents and grandparents, but for us, not so much?179172460_9d6eb7be41.jpg

Back then, homes were cheaper, and people tended to stay in them for their entire adult lives. Today, homes are much more expensive, and we move around a lot more, making homeowning riskier and more costly.

The New York Times has a handy buy. vs. rent calculator to help you figure out whether you should rent or buy in a given situation. It’s not perfect, of course: It requires you to make some predictions, such as how much homes will appreciate, how much rents will rise, and how long you expect to stay put. However, if you’re living in Los Angeles or another similarly pricey locale, the calculator will probably tell you: “Buying is never better than renting over 30 years.”

But no matter where you live, buying and owning a home is costly. Let’s say you’re buying a $300,000 home. The down payment and closing costs will run you $65,000. For a 30-year fixed-rate loan at 7 percent, your monthly payment is $1,596.73 per month. If you stay in the house until the mortgage is paid off, you’ll have paid $574,821.36 for your house in principal and interest alone. And we haven’t even talked about taxes, insurance, homeowners’ associations, maintenance, repairs, and upgrades — and the weekends and vacations you will have to devote to taking care of your home. (And lots of homes cost more than $300,000.)

I came across this great blog by a woman calling herself the Millionaire Mommy Next Door. She’s a self-made financial whiz who accumulated most of her wealth after she gave up her house and began renting. Here’s one of her posts that contains links to articles that challenge the notion that homeowning is a great investment.

Her point is that a home should be “a nest, not a nest egg” — in other words, a place to live, but not an investment, like stocks or mutual funds. The financials just don’t hold up. (She does, however, think that buying positive-cash-flow income property can be a good idea.)

I’m the first to say that there are lots of nice things about owning a home. You can fix it up any way you like; you can have as many pets as you like; you can provide stability for yourself and your children and put down roots in the community. I’m just saying that perhaps we should buy for those reasons, and not with the hope of making money. Once you’ve accepted that a home is, in fact, a money pit and not a money maker, it makes rent vs. buy decisions a whole lot more rational.

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  • Janet

    …a nest, not a nest egg. Brilliant, enough said.

    Love you Cindy, hope you are getting settled in.

  • Andrew Waite

    Cindy: I can see why you are under water on any real estate investment you have made as you seem to plan weekends better than your career or financial future. The New York Times rent versus buy calculator tips to buying being more positive in 3.5 years if you use the historic 5% average appreciation. Good neighborhoods are better than this.

    Think short term and you are right being negative, but that is not how the market works or the reality for the rest of us who are not defying economic gravity by trying to trade houses annually or even every two years. The average American remains in their home for five to ten years short of some unplanned crisis. Over buying and financing badly depending on unabated appreciation is defying gravity.

    Many of the hard tax and softer wealth accrual advantages are all ignored in these buy/rent calculations. The glaring omission is cash-on-cash appreciation on the total home asset versus just the deposit investment employed. It’s how Wall St. tries to convince us that investing in stock is better than houses. They hope we all ignore the power of leverage. Cindy and the NYT conveniently omit this irrefuatble truth. I would guess the journos who wrote the calculator and accompanying articles are renters too.

    Affordability will only get worse for those people. Always has, always will.

    What is not said in all of this is that 95% of America is current with their mortgages and this will soon improve as a balance returns to the market. The current estimated loan to value of these mortgages is 47% giving Americans some $7 plus trillion in real estate secured assets.

    Cindy: I do hope you do better on your next home because being condemned to being a renter places you at a huge social and economic disadvantage in most cities in the US.

    Best Andrew Waite – Publisher Personal Real Estate Investor Magazine.

  • Janet

    Andrew, you should run for office, you’re quite the spin doctor.

  • BlogReader

    I do not know how you can be a judge of Cindy’s weekend planning ability. Also your whole argument is based on the historic 5% average appreciation. What if that was wrong? What if for the next 5-10 years houses do not appreciate at that rate? It has certainly happened before, even in the “good neighborhoods”.

    Unlike you, I will not make generalized statements but instead talk only about myself, when I say that affordability is not getting worse for me, especially in the area I am interested in. It has been getting better. I have been waiting since the last two years to buy a house, because of which I am now in the position to buy a larger condo much closer to work.

    Since you accuse NYT journos of being biased because they are renters, can you tell me, who outside the real-estate industry would recommend buying right now?

  • Cindy Allen

    Andrew, I swear I think you don’t even read my posts. As I’ve said, I have “owned” six homes in my life, so I think I am qualified to speak about the pros and cons of owning.

    I have also said that my finances are in great shape for someone my age. Our net worth is in the mid six figures, we have no debt (NONE), and our credit scores are in the 850 range — perhaps even higher than yours, Andrew.

    You probably won’t want to read the post I’m planning for Monday, which says that most people in my age bracket have taken a huge hit in net worth because of they “invested” in real estate this decade.

    Regarding the NYT mortgage calculator, yes, everything changes when you plug in five percent or more per year in appreciation. Anything less than that, however, and the calculator tips heavily in the direction of renting.

    No one knows how much homes will appreciate in the future, but the likelihood seems high that the appreciation rate will be less. For one thing, homes are far less affordable then ever, so price appreciation means even fewer will be able to buy. In the same vein, homes are so expensive now that most of their appreciation is probably behind them.

    As with any investment, you should buy low and sell high. For real estate, that means trying to identify the next California — that as-yet undiscovered place that everyone will flock to over the next 10 to 20 years. If you can do that, you might do well on your house. If not, you’ll probably be buyin’ high.

    Even if I were planning to be in LA for the long term — I don’t know how long I’ll be here — the decision to rent or buy is a moot point. There is nothing I’ve seen that I would consider reasonably priced in an area where I’d want to live.

  • Mathew

    I think is a great article. I just think it’s hilarious that the Redfin blog consistently convinces me not to buy a house but to continue renting. Maybe Redfin should enter the apartment rental business.

  • Anon

    Yahoo Article
    Rent don’t buy your home.

  • rmac

    I think the issue here is the mis-categorization of a home you live in as an asset. Contrary to popular belief (although I think that is changing during this downturn for a large number of people) your home shouldn’t be viewed as an asset (most of the time) as you pour money into it, and it is not actively generating money for you that is liquid (as opposed to a rental property, other investments). Build your assets, minimize your liabilities and you will do fine. I own my home, and a car, so I have liabilities… I just try to spend the majority of my money on building my true assets.

  • Ed

    The only thing that this article doesn’t really take into consideration is that at some point your home is paid off. If you retire with your home paid for it surely makes a big difference in terms of your amount of disposable income in retirement vs. still paying rent.

  • l.a.guy

    I’m sure it’s a rhetorical, but if the question is “Is it ever a good investment?” then you’d have to be an idiot to say no.

    However, the same thing that makes it a good investment is the same thing that makes it a potentially disastrous investment.

    To use round numbers; I buy a house for $100,000 at 10% down. It appreciates at 5% a year and in five years it’s worth $121,550 dollars. I sale the house and I’ve made $21,550 on the original $10,000, not a bad return. Yes I paid a mortgage and property taxes, but I also got to deduct almost all of that from my incomes taxes and I would have had to pay rent anyway, so all in all it’s a good deal.

    The problem is if you buy a $100,000 house with 10% down and in 5 years it’s worth $65,000. Well now you’re far worse off than if you’d just loss the $10,000– you’ve managed to lose 3x more money than what you started with.

    The problem for a lot of the people who bought from 2004 to 2007 is that they fall in the later camp.

    Like most things in life you need to make smart, disciplined decisions.

    You think it’s an accident that some of the wealthiest people in the country got rich in real estate? Whether or not now is a good time to buy is a different question, but I guarantee some people are going to get rich off the current market.

  • Sandy

    Cindy – you keep contradicting yourself. Multiple times you brag about your supposedly high credit scores, and high net worth, and then you have also said you can’t afford the down payment for the area you want to live (post on moving into a 2-plex). I am guessing your high net work is not from documented income – hence, a lender will not lend to you. It seems like a classic case of sour grapes and your posts lack credibility.

  • Cindy Allen

    Sandy, just because someone CAN buy a house (we can) doesn’t mean they should, or want to. That’s the case with us. It’s not a contradiction to say that we have the means and credit scores to buy a home, yet we are choosing not to buy. It’s the truth.

    I don’t understand why your post has the tone it does. Why should my choice about not buying a home bother anyone? Unless you’re in the business; are you?

    My husband and I lost about $70K on our last home purchase. Despite that, we salvaged about $150K from the sale; we had used the proceeds from our 2004 sale to put a huge down payment on the San Diego house. The rest of our assets are in retirement accounts.

    A few months ago we were looking at some very small homes in an area of Long Beach that we liked. They were in the $500K range, and it was possible that buying might make sense. We ultimately decided that the commute would be a bad idea, but we did get preapproved for a $600K mortgage from BofA, just so we’d be prepared in case a killer deal presented itself.

    We’ve had many mortgages over the years and have never had trouble obtaining one; even with credit the way it is now, we were still able to get preapproved.

    I don’t think I’ve ever said I can’t afford the down payment for the area I want to live. I’m saying that homes in the area I live in (Miracle Mile L.A.) start at around $800K for a two+one fixer, and I just can’t see emptying out the bank account for such a tiny house. Also, my husband and I did qualify for a $600K house, but to even qualify for an $800K would be a stretch.

    On the other hand, my rent for the place I live now $2,400 for a 2+1 in a nice neighborhood with a yard. That’s a fraction of a mortgage payment, and we haven’t even talked about taxes, insurance, maintenance, repairs, and upgrades. And we get to keep our cash.

    Combine that with the uncertain economy and job prospects, and it makes all the sense in the world for us to rent instead of buy right now.

    In fact, you should check out my post of today. It’s about baby boomers and their lack of net worth because they bought homes in the last few years. Buyers, not renters, are the ones who threw money away in 2005-2007.

    I’m certainly open to buying again — when it makes financial sense, and in a place we’re going to say awhile. Right now, renting reduces my stress and gives me peace of mind. If something happens to one of our jobs, we have the flexibility to go where the jobs are, and the money in the bank to carry us through.

  • Brad

    Can we all just agree to ignore Andrew from now on? Unless someone has bought his $55 package he’s shilling and can say its really make them a real estate multi-millionaire, like him?

  • Andrew Waite

    Cindy: You sound awfully negative. I remain with my original statement statement, you sound like you plan your weekends better than your career.

    You have no idea of history nor what is happening outside your neighborhood. Vector the data from OFHEO and NAR than add a dose of conservatism and the aggregate historic appreciation for a home in Averageville America is a solid five percent a year since 1929! No spin, no question just the numbers. Los Angeles and California is a market exception.

    Best: Andrew Waite

  • Andrew Waite

    Brad: We do not sell a $55 package so you are wrong there. We do publish Personal Real Estate Investor Magazine which endeavors to debunk much of the mis-information abroad in the market. As such we have become the seventh best sell-through business and finance magazine in bookstores and newsstands across America.

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  • ed hardy

    Cindy: You sound awfully negative. I remain with my original statement statement, you sound like you plan your weekends better than your career.