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We Think We’re Going to Believe Grandpa

There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.

One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:

“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”


The article goes on to explain the rest of Mr. Francis’ comment:

That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”

Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:

To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.

Let’s take a closer look at this conclusion.

1. We have our own study.

Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.

2. The proper comparison is rent vs. buy.

All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…

3. In most markets today, owning is LESS expensive than renting.

Trulia recently came out with their Rent vs. Buy Index. The report shows:

that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.

For more on this issue including a 50 city breakdown, click here.

4. Current mortgage opportunities may never be available again

The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?

For more on this, click here.

5. Most Americans see more to homeownership than financial value.

Last week, Fannie Mae released the National Housing Survey. The survey reported:

  • 96% of all homeowners said homeownership has been a positive experience.
  • 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
  • 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).

Bottom Line

There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.

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9 replies
  1. David Mott
    David Mott says:

    I think that anyone that has looked at ‘investing’ in the stock market lately has probably found out that the game is rigged. Nowhere else can deep pockets borrow publicly traded shares that don’t exist (naked shorting) and sell them to create an artificially lower value. These predators can make your common shares worthless. The SCC turns a blind eye to this activity.

    The market value of your home may fluctuate, but at least it can’t be stolen right out from under you.

  2. Vince Rusinak
    Vince Rusinak says:

    What this article and most people who compare increases in home prices to increases in the S&P forget is that few people put down 100% of the cost of a home when they purchase one; however, when they must put down 100% when they purchase stocks. For example if a homebuyer were to put $10,000 down on a $100,000 home and that home appreciated $10,000, the homeowner would have netted 100% on their investment; however, someone purchasing stocks for $100,000 and if that stock were to increase by the same $10,000, they would have only netted 10% on there money. When it becomes a bit crazy is when someone has purchased a home with no money down and that home increases in value, regardless of the amount. How do you determine their rate of return…this can only happen when you purchase real estate.

  3. Matt Robinson
    Matt Robinson says:

    Nobody will ever get a loan from a financial institution to purchase any other type of investment for 80-95% of the determined value. Homes are physical structures rather than financial inventions so, even if they depreciate, they still have plenty of use for the owner to live in or even rent out. I deal with plenty of leases in Chicago and even when a home owner owes more than the home is currently worth, often they can still rent it out and cover the mortgage payment and taxes. No other investment has this type of flexibility and option of courses. Beyond that, the interest payments are tax deductible and there are tons of tax breaks for going green and being energy efficient.

  4. David Mott
    David Mott says:

    I saw that tech-ticker video. His arguments against owning a home are weak. I’m going to guess that he is now wealthy enough to afford renting from now on. He makes no mention of the landlord aspect of home ownership. A home that is paid for and then rented out usually more than pays for the taxes, insurance, and the upkeep that it requires.

    Let’s say the property cost 200K in cash.
    $250 a month in taxes and insurance with $200 a month upkeep (averaged).
    Taxes, insurance and upkeep are deductible on the Schedule E.
    If the rent is $1200, then $1200-$450 = $750 monthly income.
    $750 * 12 = $9000. $9K is a 4.5% return on 200K. It’s insured too.
    Taxes and insurance go up? Go up on the rent!

    Not only is the $200K capital invested producing a 4.5% return, the property is (usually) appreciating, so the 4.5% income is just mailbox money. When you sell, you can get your $200K back, have tax breaks on the side, and most likely end up with some capital gains too.

    Imagine having 100K invested and getting that return (9%).

    We have all read about certain times when folks want to take their money out of the banks and put it somewhere safe. If banks aren’t safe, are stocks? If you have your money tied up in a home, it’s pretty difficult to steal it (especially if the home is paid for).

    Having a happy renter that is paying off your personal debt (mortgage) is a wonderful thing.

    P.S. I meant SEC in the post above. If you google SEC and naked shorting, you will see what I mean. Wikipedia has a good article on the topic.

  5. Tabitha Zesch
    Tabitha Zesch says:

    In order to accurately compare the R.O.I. of the stock market to real estate, one must compare the amount of cash invested into each. If the property given as an example in David’s comment were purchased with a 10% down payment, the 4.5% return (of $9,000) would have actually been earned on an investment of only $20,000, thereby creating a return of 45%.


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  1. […] There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment. Full Story […]

  2. […] by The KCM Crew on March 22, 2011 · 7 comments […]

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