I am writing this post as a follow-up to my comments back in November of 2008, Readjusting our Priorities: What’s a House For? in which I explored the importance of having the proper perspective when buying or owning a home. At that time my neighbors were coming to me concerned about the drop in real estate values. I recall the distinct feeling that instead of speaking with me as a neighborhood Realtor®, they were questioning me as if I was a stock broker!
I’ve been a Realtor® going on 9 years and many people are shocked when I tell them that A HOME IS NOT AN INVESTMENT. Quite the contrary. In the current market a huge number of homes have been losing value since 2007 and the most current reports show that almost 25% of home mortgages are “underwater” which is a nice way of saying that the owners owe more than the mortgage is worth. Not exactly what I’d call a good investment, and I’m not even a stock broker. So for those of you who are planning to buy a home this year, I’d like you to repeat the following:
My 2010 Resolution: I will not buy a home as an investment!
Here’s why: In a recent Wall Street Journal article by Karen Pence, Chief Federal Reserve Economist in charge of the Household and Real Estate Finance Section, summarizes why homes are a lousy investment:
- It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
- It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
- Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
- It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
- It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.
So Why Buy a House?
Please allow me to revisit an important idea expressed by Steve Kerch, the award winning real estate journalist of Market Watch. This persistent drop in home values should remind us that houses aren’t really “investments.” In his article, entitled Core Values, Mr. Kerch asks us to consider the following:
“At its core, a house is a shelter. Unless the roof caves in, there is always some economic value in that. But most people when they dream about a house or start looking for a house or actually buy one think about value in a whole different way: they think about the fireplace they can gather around with their families, the kitchen where they can show off their culinary skills, the bathroom that they won’t have to share, the schools they will be able to send their kids to, the neighbors they will be able to entertain in the backyard, the parks they can bike and hike and the community events they will be able to attend.”
I believe most people hope that their homes will gain value over a number of years. We all want to believe that it’s “worth it” to buy a house. I also believe that we are connected to our homes by values and emotions that transcend monetary gain. For all of you “bean counters” this may be too foofy a concept so you would do better to continue renting or living with your mother. Just remember that when you’re ready to march out and buy a home, do it for the right reasons. Oh, and get a good Real Estate Professional to help you.
A home is technically an “investment” when it is revenue positive; that is, one is actually making a profit at the end of the month. This basically means it’s a rental property.
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