Homes Are for Living In, Not Making Money

Since we were young, we have been taught, by our parents and our grandparents and our local real estate agents, that we should own a house.  We’ve also been led to believe that real estate is an excellent investment.

It’s clear from the current housing disaster that real estate is not always a great investment; in fact, it has been the path to financial ruin in the hands of naive and/or greedy buyers and unscrupulous, irresponsible lenders. house-money.jpg

Everyone has to spend money on a place to live.  If you’re going to live in one place for a long time, the financials for buying have a better chance of working out in your favor.  This is one reason real estate was a “good investment” for our parents — they bought (at much lower prices) and stayed put, which meant only one real estate commission and one set of moving expenses and closing costs.  They eventually paid off the house and enjoyed a mortgage-free retirement.

But if you’re moving every five years or so — as many Americans do these days — owning may not work so well financially.  Paying commissions and closing costs every few years is expensive.  Factor in taxes, repairs, maintenance, and upgrades, and you’ll spend far more on a house than you ever did renting, and unless you happen to be lucky enough to sell in a sellers’ market, you could easily lose money.

Until you pay off your home, you don’t really “own” it anyway — all you own is the obligation.  It’s like buying a stock on margin: You benefit if the value goes up and suffer if it goes down. 

Real estate agents used to say that you should buy a home if you’re planning to stay put seven years or more.  Most don’t say that anymore, because they know hardly anyone stays put for that long.  It’s to their benefit to tell you it’s always a good time to buy, but it’s not always true.  You have to evaluate your personal situation and decide what’s best for you.

Financials aren’t the only consideration when deciding between buying and renting.  But it has to be a factor.

A commenter on Jon Lansner’s real estate blog dug up this Redfin listing on a Mission Viejo house.  It’s a lovely five-bedroom, two-bath, single-story home, 2,246 square feet, built in 1969. Here’s its sales history:

1988: $185,000
1990: $285,000
2000: $380,000
2004: $600,000
2006: $820,000
2008: $573,750 (bank purchase)
Current listing price:  $490,000

If you were the person who bought in 2004 and sold in 2006, you did well.  The 2006 buyer, not so much.  On the other hand, if this house were still owned by the person who bought it in 1988, that owner would be sitting on a pile of equity.

But the person who owned between 1990 and 2000 saw the house appreciate in value $90,000 in 10 years. Deduct the real estate commission, taxes, and other expenses, and that house appreciated only a few percent a year. 

But maybe the owners had a great 10 years in that house and were just happy to get a check at escrow.  Which is exactly the point.  A house should be a place to live in, enjoy, entertain, raise children, and create memories. If you “make money” on it, that’s great.  But that should not be the prime objective.

Recent Redfin posts:
Road Improvements in South Orange County
Gas Prices and the Housing Market – Part 2 
Fannie and Freddie:  How the Mighty Have Fallen

  • Quang Pham

    This is a great article. I haven’t read a more frank, thoughtful, short but get-to-the-point article like this one. It gives me a lot to think about before deciding my next home purchase.

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    I’m glad you found it helpful, Quang. Thanks for reading the blog.