September 24. 2007 12:22

I don’t disagree that there’s an investment potential in owning a home, but I think it’s important to make sure we’re comparing apples with apples. It’s true that a home can be considered someone’s investment, but there’s a big difference between “investing” in the stock market and in a home. It’s easy to confuse the payments we make over the life of a mortgage loan with what we’re truly investing in a home. If we want to compare the return on investment from a home to other types of investments, we need to segregate the amount of cash a homeowner invests into the home from the true cost of living in that home.
Whether you own a home or rent, there is simply a cost to live somewhere. And the cost to build and operate a home is going to be comparable regardless of who owns it. Identical homes built side by side, one owned, one rented, all other factors being equal, cost the same build and operate. Therefore the interest, taxes, operating expenses, etc. really don’t have anything to do with the owner’s initial cash outlay. So let’s compare the return for the actual cash being invested in a home versus that same cash invested elsewhere.
(For the sake of comparison, let’s assume a $250,000 home and a 20% cash down payment)
If someone invests $50,000 cash in the stock market or elsewhere for 5 years with an annual appreciation of 5%, the $50,000 is worth roughly $63,814.00. If the owner sells, the return on investment is $13,814.00.
If someone invests $50,000 cash into a new home that is valued at $250,000 and that home appreciates 5% per year for 5 years, the home will be valued at $319,070.00. If the owner sells, the return on investment is $69,070.00 on the original $50,000.00 investment or roughly five times the amount earned in the stock market. The obvious difference is that the homeowner is leveraging the appreciation of the entire home value - not just the $50,000.00.
There are numerous other differences between owning and renting that favor ownership such as the ability to deduct interest and real estate taxes as well as the fact that interest rates for homeownership are typically lower than the commercial rates a landlord might pay. There are benefits to renting vs. owning, but make no mistake-the landlord owns the property to make a profit (and they should). When you make a rent payment you are paying for the cost of that structure, maintenance, interest, taxes and profit for the landlord. When you move on, all the financial benefits of real estate ownership remain with the landlord.
The examples above are very simplistic and are intended for illustration purposes only. I would highly recommend that you visit with your accountant if you are weighing the decision to rent or own. But, I think most will find that the advantages of homeownership still far outweigh the risks.

Todd b

todd b

October 5. 2007 12:19

The main reason to own your own home is to control your own space. That may sound simplistic but with the world so full of uncertainty it is great to come back to your own place-a place where the walls are painted the colors you like, maybe you have pets or a garden that lets you get your hands in the dirt and create something. It is the best thing you can buy for your mental health. Having a permanent address is definitely the first step in building personal wealth. What other "investment" can you live in while it is growing in value? Sandy L.

Sandy Loescher

October 7. 2007 20:03

68K is the interest on 200K (amortized at 7%) you will pay over 5 years, and somewhere around 15K in property taxes, plus any maintenance...owning has its benefits, but supplemental costs and investments should be accounted for when comparing the two IMO...

I have to disagree with the article and comment regarding a 5-6% gain assumption on stocks versus real estate gains, just Google "average stock market return", then "average real estate return"...

Steve

October 14. 2007 17:05

I appreciate your comments. You're correct that there are many factors to homeownership. My comments were not intended to suggest that earnings in the stock market or the real estate market are at any particular level. I am simply trying to say that there is a net difference in cash between what a buyer "invests" at the time they close on the purchase of a home and the cash they walk away with when they sell it. I think that fact gets lost in all the discussion about real estate values going up or down.

todd b

October 23. 2007 20:29

This is an interesting discussion - homeownership as a form of investment.

It seems that in some ways home ownership lets consumers invest in the marketplace in the same way that financial investors invest in options. You buy rights into an asset - usually by making a very small investment as a percentage of the overall value of the asset (in this case, a home). In this case, you also get to use the asset while you own this theoretical "option". The interest you pay the mortgage company would be similar in this example to carrying costs for owning an investment.

At some point in the future, you may decide to sell the asset. If you do, you enjoy the benefit of the market appreciation on the entire amount, not just your smaller investment. If things go very poorly, you walk away and you're only out the amount you invested up front. You may think that is extreme, but more people are doing it today than ever before.

But like wall street will tell you, for every financial transaction there is a winner and a corresponding and equal loser. Its a great time to buy in or up in this market. Its a terrible time to sell out of or buy down in this market. For many of those people, home ownership was a terrible investment. And like an option, they are simply cutting their losses and walking away in record numbers.

I can't wait until the bottom hits so I can buy back into this market. My wife and I have ben living in an apartment (converted condo) for almost two years now and in 2009 intend to buy back in. Our stock portfolio from the proceeds of the sale of our home in Orono have done great. When we rebuy in 2009, we may be able to pay cash for our home.

Like every other market, the key to the housing market is to buy low and sell high.

So buy already!

RogerS

October 27. 2007 07:14

I wish I had always bought low and sold high! I think you're correct in assuming there will be some good buys out there. Some national economists seem to think that permits will begin to pick up in late '08 or early '09, but that's based on national averages. Real estate is VERY local, so even in a tough market there are great opportunities to both buy and sell -if you do your homework. Happy hunting!!!

todd b

November 1. 2007 03:46

I went to a seminar once that the presenter said "real estate is a great investment, but it takes you so long to lose your money"
I believe that ownership is probably good because it is a somewhat "forced" investment. The fact remains that most mortgages are not paying any principal the first two years or so. In effect over the length of the mortgage you pay for your house 2-3 times. I found a way for those who have equity and good credit to pay off most mortgages in my case saving about 230 thousand dollars in most cases saving more. Would you invest $3500 to save up to 10 times that amount. I would and I am. If I follow my prompts my house (condo) will be paid for in 6.5 years.

Patrick