Home ownership has often been considered a critical component of the "American Dream," as an unwritten privilege living in America bestowed on its financially secure citizens. In the wake of the housing crisis, few are asking whether the dream was real or not, but rather are asking, when will we be restored our proper rights as citizens - our right to once again own our own homes? The home ownership dream has pervaded as more of a myth than a reality and this will always be the case, regardless of how the current crisis shakes out.
When making the decision to buy versus rent a home, people generally consider several factors. First, they compare rent vs mortgage - which costs more on a monthly basis? But there are more components to the monthly cost of ownership. Below is a list of costs that are baked into your rental price, but added to a monthly mortgage payment.
- Your insurance premium.
- Property taxes (which is usually higher than any tax deduction you get from your mortgage interest)
- Maintenance (pipes break, electricity problems, etc)
- Utilities (utilities and maintenance for renters is often reflected in the rental price already but its NOT reflected in a mortgage when you own)
- Yardwork, pest control, remodeling, etc (again, rents usually have this built into the price but mortgages don't)
Lets also not forget those initial costs that always seem to add up to more than you expect:
- Real estate agent costs (6%)
- Closing costs (usually 5% of loan amount)
- Initial remodeling costs
Not to mention that you are completely out of that cash after making your down payment. You will never see that cash again. Even if you sell, home owners usually roll over that initial downpayment into a new house for tax purposes. Cash is king and I prefer having my cash in the bank.
Okay, so when you buy you spend more per month and your initial costs means that the house would appreciate 10-20% on day one in order for you to break even. But thats said to be okay because you have the house as an investment, right? Forgetting about the recent decline (housing prices will go up again at some point) and forgetting about all of these extra costs which you are never going to make back,
- is housing a good investment?
Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices which have made these numbers a lot worse), housing went up a dismal 0.4% per year versus 8% for the stock market (source: Social Security Advisory Board).
"But real estate is an asset as opposed to throwing money away renting". Rather than spend $100-200k+ on a down payment for a house (which is like throwing money away since it is completely illiquid as long as you own the house) you can put that money in a portfolio of diversified REITS (REZ is an ETF of residential REITs, for instance) if you truly believe in housing. You can do it with some leverage as well if you believe in the idea (like 90% of Americans do) that you should leverage up 200% the single largest investment in your portfolio (your house).
As an investment, housing represents:
- No diversification
- No liquidity, particularly in times of stress
- Way too much leverage for a significant chunk of your portfolio
- Huge initial sunk costs, extra monthly costs, and huge time costs to deal with the investment.
It's also a lot more hassle to shovel your own snow in the winter.
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