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Is Homeownership a Good FINANCIAL Decision?

Many have reported on Robert Shiller’s recent comments on the investment aspect of homeownership. Shiller, a Yale professor and co-founder of the Case-Shiller Home Price Index, is famous for making provocative comments on house prices and the financial benefits of owning a home. In a recent Bloomberg Television interview, Shiller responded to a question about homeownership as an investment this way:

“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, ‘Yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do.”

Today, we would like to debate Shiller’s notion by offering three FINANCIAL reasons to purchase a home:

1.) You Can’t Live in Your IRA

When you buy your own home you are not taking available dollars away from another investment. You are replacing one housing expense (rent) which has no potential for a return on investment with another (mortgage payment) that does give you an opportunity for a return. We realize that there has been research showing that over the last 30 years renting has been less expensive than owning. That research also says that if you invested the entire difference between the rent payment and mortgage payment you may have done better financially. There are two challenges with this conclusion:

  • Today, in the vast majority of the country, renting is actually more expensive than owning a home.
  • History has proven that tenants DO NOT invest the difference in their rent and mortgage payments.

2.) Homeownership Creates Wealth

Paying a mortgage creates what financial experts call ‘forced savings’. The Joint Center for Housing Studies at Harvard University released a study titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

3.) There Are Tremendous Tax Advantages to Investing in a Home

There is no doubt that selling an investment such as gold is easier than selling your home. However, this liquidity comes at a price. The price is called capital gains. That is the tax you pay on any financial gain you receive from the investment. This tax doesn’t apply the same way when you sell your primary residence:

Theresa Palagonia, a CPA and the Accounting Manager for the firm G.S. Garritano & Associates, was good enough to explain the Home Sale Exclusion Rules:

“You may qualify to exclude from your income all or part of any gain from the sale of your main home.

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

  • You meet the ownership test.
  • You meet the use test.
  • During the 2 year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions listed above.

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements. (Special rules apply for joint returns.)

We will let you decide for yourself whether homeownership makes sense financially.

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4 replies
  1. goldye
    goldye says:

    This article does NOT give true facts or a reality check. While most of the U.S. would apply in above article, it does NOT represent expensive cost of living areas i.e. New York City, Los Angeles, Boston, etc. and their suburbs. Housing and monthly expenses force many residents to rent vs. home ownership because property taxes, listing prices, maintenance and closing costs are more expensive than renting. You do not save any money or have a higher net worth after buying a home in one of these expensive cities. I saved more money renting over 30 yrs. in the NYC area than if we purchased a home. We recently purchased a condo so now we’re finally homeowners after 30 yrs.

    • KCMcrew
      KCMcrew says:

      Thank you for commenting. We realize that, in some cases, over the last 30 years it may have made sense to rent. As a matter of fact, in the blog post, we linked
      to a study that shows that. However, right now, this is not the case. According to a recent study by Trulia, the only two cities in the U.S. that it is not less expensive to buy are San Francisco and Honolulu.

      Regarding our facts, we linked to three different experts:

      1.) Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research.

      2.) The Joint Center for Housing Studies at Harvard University

      3.) A Certified Public Accountant

      Which of their ‘facts’ are you disputing?

      I’m glad you did well renting over the last 30 years. However, do you really
      believe that the rent you paid was less (unless you were in a rent controlled
      unit) than the expenses the landlord incurred for that unit? Very view
      landlords/investors rent a unit for less than the unit actually costs them.

  2. Chezkir
    Chezkir says:

    Home ownership is still an investment if you buy an owner occupied multi-unit and manage it wisely. For me, living in a small apartment with 2 other apartments to help pay the mortgage: (A) means my net expense is $500 plus utilities; (B) means I can share the mortgage cost without having roommates share my space; (C) meant I could buy an entire building and control it, on short sale, in 2009, for $15,000 less than I sold my condo for, in 2008; (C) has been a boon while I am unemployed / underemployed. And it has many tax advantages.


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