Is Home Ownership A Good Investment?
| April 3, 2008 | Posted by Roshawn Watson under Uncategorized |
Since late 1990s, the average prices have nearly doubled. This has caused many people to try to purchase as much home as they can afford. However, if you look at a more long-term view, you will get a more complete picture. Robert Shiller, a Yale Professor, tracks real estate history. According to his research, from 1890 -1990, there was virtually no change in real inflation corrected real estate prices.
Professor Jack Clark Francis, Baruch College, research also indicates that single family homes are not a good investment when compared to other asset classes. His research indicates that from 1978-2006 the S&P; 500 has averaged a 13% return, stock from small companies (small cap) has averaged 16% while single-family homes only realized a 7% ROI (return on investment per annum). Interestingly, he corrected for rental income in his calculations.
There are several things that eat up profits from appreciation. For example, home insurance, maintenance costs, and repairs are routine expenses for home owners. As someone who recently repaired a roof, believe me when I say that I know this to be true. However, home owners are able to deduct mortgage interest and earn tax free profits upon selling. Additionally, there are other intangible benefits, such as the psychic boost one gets, better school systems in certain zip codes, and higher status.
The American Dream: Asset or Liability
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Here is a question for you. If home ownership is an investment, where the dividend and ROI if you do not sell?
Home ownership is only an investment once you sell it at a profit.
So in my market, I can pay $900 to rent or $1000 to own. With the rent, I get 0 ROI, with the house I'm at least getting a % of that back (just ignoring any increase in home value).To me, if my total averge monthly "investment" is more that $100 (that is, increase in equity. And including expenses), then I'm coming out ahead.
I agree, buying a house is a great investment for when you retire. I won't be able to afford Oxford rents when I retire!
Anonymous, I thinking owning a house long-term is just fine. As you point out, you can easily come out ahead. However, in the short-term, the house could depreciate. That is when it is easy to lose money.Tejvan, I agree that it is a great idea to own a house by the time one retires. Hopefully, by that time the house is completely paid off too 🙂 Cheers,
Ann,I do think home-ownership can potentially still be an investment even if you do not sell it for a profit: it just was a bad investment. Personally, I would rather not consider where I live an investment.
With the housing market being as unstable as it is at the moment, there's no easy answer to the rent/own problem. On the one hand, house prices are lower, yet mortgages are much harder to obtain. Even if you are able to get a mortgage, should you buy? Are house prices set to fall even more in the future?Advice that is being given to a lot of worried home-owners is to sell and rent back your home in order to get a quick property sale and receive a substantial percentage of the sale price.
Sam Lyons,I think I know where you are coming from. I do believe that it is great if someone makes money off the sale of their home, especially if they want to move anyway. I just do not believe that it is an "investment."It's this "investment" mentality that causes "buyers" to buy as much home as they think they can afford. Unfortunately, they are often so house poor that the only people getting rich is the mortgage holders. Personally, I wouldn't allow worry to cause me to sell my home. I would sell after evaluating my ability to pay for the house and my other financial goals. If I was paying too much or had financial goals that could not be achieved with the house, then I would move. I hate making fear-based decisions. It's an easy way to lose money. Thanks for the great comment.Friendly Regards,Roshawn