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:
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.
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This is not financial advice. Please consult a professional advisor.
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4 comments:
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.
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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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.
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