Posted on 04/23/2014 7:43:15 AM PDT by SeekAndFind
Most people include home ownership as one of the basic elements of the American Dream. It stands not just for independence, but also in most minds an investment in tangible and significant property. It’s not a universally-held goal — some people prefer to rent even with the means to own — but home ownership is usually seen as one of the building blocks to middle-class wealth.
As I noted, some people prefer to avoid home ownership, but not usually on the basis of it being a lousy investment. See if you can pick out the huge, gaping flaw that the Washington Post’s editors apparently missed in Catherine Rampell’s column:
The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. Don’t take my word for it; ask Robert Shiller, winner of the 2013 Nobel Prize in economics who previously became a household name for identifying the housing bubble.
“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,” he told me. “And technological progress keeps bringing the cost of construction down.” Meaning your worn, old-fashioned home is competing with new, relatively inexpensive ones.
Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5 percent.
Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.
Perhaps it helps to identify the one word that Rampell never includes in this essay … rent. The primary home is not just “a single, large, highly illiquid asset”; it’s where people live, too. If they don’t have a house to own, they will have to pay rent.
For instance, I’ve owned my current house for a little over sixteen years, and it’s the longest I’ve ever lived in one place. I’ve paid between $1,050-$1,125 each month for my “investment,” and the rents in my community for even a somewhat-smaller place run at least that amount (according to Zillow). Either way, I’d have paid roughly $211,200 for a place to live. However, I had the choice to sink that cash into either a property in which a significant amount cash would be recoverable in a sale (equity), or handing it all over to a landlord with no return on it whatsoever.
Which is the better investment? Even if I could squeeze into a smaller space (2 bedrooms), I’d only have saved about $200 a month, or roughly $38,000 overall. In sixteen years, my equity has increased by about three times that amount, even with the housing bubble and crash a few years ago. I didn’t just go out and burn $172,800 by handing it to another property owner without a stake in the property for myself. This may not turn out to be the best investment I’ve ever made in terms of pure cash return, but it’s saved me at least the $172,800 I would have spent without any return at all — which in real terms makes it the best possible investment I could have made.
Now, this may not be the biggest issue in the public square at the moment, but Rampell’s argument had to go through the “layers of fact-checkers and editors” we hear exist at journalistic outlets such as the Post. Yet no one apparently knew enough about the concept of “rent” and “opportunity cost” to flag the column and ask Rampell to address the gaping hole in her argument. Odd, and it suggests that the people involved aren’t terribly well acquainted with economic reality.
Update: Jim Geraghty suggests other ways to get government out of subsidizing the American Dream. Also, Rampell’s point about scaling back or ending government policies that incentivize home ownership actually works better by underscoring what a great ”investment” primary home ownership actually is. Why do we need to incentivize it when the opportunity costs already do so as strongly as they do?
Update: Great discussion in the comments. I’ll only add one more point in the post itself. Most people have the choice to own or rent their living space (the others will either inherit or live with relatives). The choice is, respectively, to put money into your own real-estate investment or into someone else’s. Absent the need to be mobile and assuming one is capitalized enough to afford a rational down payment on a rationally-priced home, why would the latter be a better choice in terms of investment?
Jus' sayn'....
....and this saving for retirement stuff is sooo overrated...............
Pay rent, you keep none of your payment. Pay a mortgage payment, keep a little more of it every month. We’re within 18 months of payoff. Then we keep it all.
I also note that the objections seem to center on the structure when it’s really the property that carries the bulk of the value in many places. (DC especially.)
That said, I don’t think home ownership is a particularly great investment, but it’s still better than throwing money away on rent.
Washington Post: Collective ownership is the future! Sieze the means of production!
The fact that a writer for a supposedly prestigious national publication can get away with using lazy language such as “financially fetishize” baffles me.
Depends on what you bought, when you bought it, and where you bought it. Real estate good during inflationary times; bad in deflationary times. Real estate good in Texas; bad in hollowed-out inner-cities.
In general, though, real estate has been an excellent investment until the the perfect real estate mega-bubble was produced by the perfect storm of criminal loan fraud, criminal money pumping, and criminal government collusion during the last years of the last Bush administration.
Renting in not a viable alternative. The only alternative would be to buy a much less expensive home outright and have no payments vs leveraging yourself to the max to buy the most expensive property you can pay the mortgage on.
The thing that really makes home owndership a good investment is inflation.
That said, I owned my own home for 18 years in Seattle before it was ripped from me in a divorce in 1997. I rented for ten years and during all that time except the first year lived in much better homes than the one I had owned.
And to give the rental game during the housing price runup some perspective: The home I rented for several years cost me $1,600 a month. If I had purchased it on a standard 30 year loan, even with the very low rates at the time, my monthly payment, including real estate taxes, would have been ~$3,450. And when the bust came I would have been almost $200,000 in the hole.
I told people in the later 2000’s that it was a severel dangerous proposition to own a home. That being said, I DID buy a place in 2008, two weeks before the election. But it is not the kind of place you would want to rent. As the author says, it is where you LIVE. And property that you own gives you certain utility. In our case, it was the ~32 acres in this slide show of our property in central KY. I consider it to be the best investment I ever made. Period.
http://s409.photobucket.com/user/robbbb4/slideshow/Kentucky%20home
Journalist: Clue one about limited IQ.
Works for WaPo: Clue two about limited IQ.
Tried to use math: Journalist using math? Bwahahahahaha.
The only way MSM “journalists” get returns on their investments is to await inclusion in to the “Corrupt Club of the East Coast”.
If they really hit the big time by demonstrating no ability, no morals, and absolutely no IQ, they might even get to work in the West Wing.
The big mistake is that they’re viewing the home as an “investment” instrument to make money. It can function that way, but that’s not the best use of it. It is better to view it as an “investment” in the future of your family, and as the purchase of a basic necessity so you don’t have to rely on someone else to provide it for you. Of course, you’re still essentially “renting” it from the government, though, and that really needs to be fixed.
How does home ownership stand for independence, when, if you fail to pay up on your property tax RENT, .gov will be kicking in your door and throwing you in jail?
I look at it this way:
RENT: write a rental check 12 times a year for 30 years and you have 360 cancelled checks to show for it.
BUY: write a check for the mortgage 12 times a year for 30 years and you have a PAID FOR HOME and 360 cancelled checks to show for it.
The choice: 360 cancelled RENTAL checks or a PAID UP home.
Either way you are going to have to write that “place to live” check each month.
A “home” is where you live. When ready you can sell that “paid up house” for real money, even if there is no “profit”.
The cancelled rental checks might be enough to toast some marshmellows.
We own our home, paid off a few years back. We never considered it an investment. It is a home. We took advantage of the tax deduction for mortgage interest, and we do own property that has value. It is larger than an apartment. There is no real risk of being asked to leave.
I do agree that a house should not be purchased with the goal of making money on it. But it is a better alternative than renting, for most people.
None of those people owned their homes. The banks did.
If land ownership really were overrated, why did the BLM press their case in Nevada, to the point of an armed standoff?
Wow - nice digs! Thanks for sharing it. What are the property taxes? How about tornado threats?
RE: I do agree that a house should not be purchased with the goal of making money on it. But it is a better alternative than renting, for most people.
How about this investment — Owning property TO RENT OUT?
How does that compare to owning stocks in the longer run?
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