Sunday, February 28, 2010

A New Paradigm for Home Ownership

As long as I can remember, the conventional wisdom for housing was: 1)a home is a good investment; and therefore, 2) own intead of rent. There have been articles about how a home is a "safe" investment that "always" appreciated on an inflation adjusted basis. Renting meant throwing away good money, while owning and paying a mortgage was financially "smart," due to tax deductions and saving through building equity.

The real estate crash of 2007-2009 has significantly revised the conventional wisdom for housing. A home is no longer a guaranteed appreciating investment. For now, I expect housing prices will be flat at best and probably declining for several more years. As more homeowners walk away from underwater mortgages, the growth in available housing supply will keep home prices from rising.

Renting now appears to be the smarter option, especially in markets where home prices have decline significantly. Homeowners can sometimes rent equivalent houses for much less their monthly mortgage payment.

Here's my new paradigm for home ownership:
  • A home is a place for me to live. I want a home that provides shelter and amenities that make our life comfortable, including good location, good schools and good neighbors.

    It's not an investment. It's not retirement savings. It may or may not appreciate. It's probably a liability, since it consumes about 25% of our monthly expenses even though we've paid off the mortgage. Property taxes, untilities, and insurance are still pretty expensive :-)

  • Owning versus renting is a lifestyle decision. I choose owning because I prefer the lifestyle, even though it may be more cost effective to rent. Owning offers stability while renting provides flexibility. If I were much younger and without children, I would probably be renting.
  • It will probably be at least 5, and maybe 10, years before our house gets back to the purchase price of 2003. However, since we think of our house only as a place to live, we won't worry about its value until we sell, which is at least 15 years away.

    For more on New Beginnings, check back every Sunday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2010 Achievement Catalyst, LLC


    sekishin said...

    For me, the ability to improve/modify your property is a HUGE factor in not renting. As a renter, you are locked in to the property as is, or otherwise to spend your money/time to improve a property that is not your own and only after the owner's approval.

    Edwin said...

    While home ownership definitely has it's advantages (particularly when you can afford it), I'm glad more and more people are seeing that its not a simple decision like it has been made out to be int he past.

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    Bret @ Hope to Prosper said...

    If someone:

    1. Needs a place to live
    2. Can afford the mortgage
    3. Has a stable income
    4. Won't be moving for at least 5 years

    Then, a home could be a great long-term investment. And, right now is a really good time to buy one. Housing may go down for another year or so. But, it will go back up at some point. (Not counting dying rust-belt cities.)

    A house is a "real" asset. It's value goes up during inflation (unlike currency) and it cannot be defaulted or bankrupted (unlike securities). So, it's value may fluctuate, but it's never worth zero (like my GM stock). Plus, it's heavily tax advantaged.

    The mortgage is the liability. And, once you pay it off, you own the asset free and clear. The great thing about a mortgage is it doesn't go up (unless you refinance or get an ARM). Rent goes up indefinitely and it lasts forever.

    Before you consider renting as a "lifestyle decision", calculate how much rent will cost in XX years, when you are living on what's left of Social Security. Then, compare that with living in a house that's paid for. Think long-term, like Warren Buffett.

    If you want to travel, move around or relocate to climb the ladder, then you should definitely rent. If you want to provide a stable life for your family and accumulate wealth, then consider buying a house.