There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.
One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:
"For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment."
The article goes on to explain the rest of Mr. Francis' comment:
That was good advice until 2006 when home prices collapsed, he says, and it "may become good advice 10 years from now, but right now it's not."
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:
To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. "I keep telling them this is not the time to buy," he says.
Let's take a closer look at this conclusion.
1. We have our own study.
Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.
2. The proper comparison is rent vs. buy.
All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can't live in their 401k or their IRA. This leads us to...
3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America's 50 largest cities.
For more on this issue including a 50 city breakdown, click here.
4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?
For more on this, click here.
5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:
- 96% of all homeowners said homeownership has been a positive experience.
- 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
- 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).
Bottom Line
There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.
Reposted with permission from the KCM Crew on March 22, 2011
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