It used to be that real estate loans were "non-recourse", meaning that the lender was limited to repossession of the property in satisfaction of the loan. I'm not sure whether the latest bankruptcy laws changed that.
But I do have a comment regarding the frequently quoted fact that the median-income buyer can't afford the financing costs of the median priced home. This statement seems to overlook the fact that a great percentage of buyers are not "first-time" buyers.
In order to relocate, or move up, many buyers are selling homes with considerable equity and then, of necessity, moving that equity into a different property.
I am certainly among those who could never afford to buy the house I am living in if I had to purchase it outright. But if I sold this house, I could buy one roughly equivalent while living off my modest retirement savings. So the fact is, the median income does not have to be able to purchase the median priced home.
Young people, who have the median income, may be disapponted to realize that they cannot buy their dream home first. But few of us have ever been able to do that.
Another thing that people miss is that home loans are typically very highly leveraged. (Duh! We can see that now.)
Except for exceptional times like this, the typical home buyer might put only 10% down. The long-term appreciaton of single-family homes is about 8%, I think. But if one holds an asset like a $100k house with 10% equity, then the early returns on the equity approach 80%. That compares very well with un-leveraged returns on the S&P 500 of about 10%.
The answer to the question of whether to invest in a home or invest in stocks is probably "both".
You make a great point, but every move-up buyer needs to sell his home to someone before he can buy and move up.
The 1st time buyers are the foundation upon which the move-up buyers rely. If 1st time buyers cannot afford to purchase your home, or the home of the guy who wants to buy your home, you can’t sell unless home prices drop to what the 1st time buyer can afford to pay.
The first rule of home buying is that people have to be able to afford to buy the home. The recent gamesmanship with ARMs, Jumbos, NINJAs, and interest only loans dramatically expanded the pool of 1st time home buyers who could afford to buy your home, at least in the short term until those rate resets come due.
That artificially easy money is now dead. The credit crunch is bringing sanity back to the market, and the pool of 1st time buyers has shrunk back down to who can afford to put 20% down and fund a 30-year fixed mortgage at today’s market rates.
Current home prices in bubble regions are still somewhere above this level of affordability, but below peak values. Until home prices come down to where the pool of 1st time home buyers can afford to buy starter homes, the move up buyers are going to be mostly staying right where they are.
This is just my opinion. I’m not financial genius or anything. Just a logical person.
I certainly agree with this. I do believe homes are a great investment. Whether a home or whether stock market investments will outperform the other comes down to so many factors, that one or the other may be the better investment for different people in different situations.
House location, condition, purchase price, vacancy rates, credit-worthiness, the number of homes for rent in a neighborhood,stock market investor risk tolerance, investment vehicle, all of these variables are going to affect your investment performance.
I think homes are generally a great investment. But I have to agree with the author of the article, who believes current home asking prices are still too high to make them automatically a great investment.