Should You Invest in a Home?

by Dr. Ben on November 14, 2011

Absolutely not!  Your home is a place to live and an alternative to renting, but it may be worth more or less in the future.  There are plenty of investment options and for most of a century a home was touted as an excellent “investment,” and with few exceptions the strategy worked. This folklore led many people to purchase their home in anticipation that it would be worth more every year.  Surprise!  What worked in the past may not work now or in the future.

A Home Meets Many Needs

Home ownership has the potential to satisfy many needs:  security, stability, pride, ego, etc.; whether or not it produces increasing value.   These features make home ownership desirable.  However, the “Real Estate Bubble,” and collapse have left many “upside down,” owing more than the current value of their property.

A “Buyers Market”

Since appreciation is not guaranteed a “back to the basics” view is important.  For several decades the financial industry and the government conspired to increase the percentage of home ownership by improving affordability through a variety of tactics:  variable interest rates, longer mortgage terms, 100% or more financing, stated income loans, reduced income to loan requirements, etc.  This artificially inflated housing prices as there was an ever increasing supply of customers.  It became a “seller’s market.”  Now the tables have turned, the bubble has burst, and it’s a buyer’s market where cash buyers, or those with sizable down-payments and good credit can make “good deals” at low interest rates and attractive terms.  And they have a sizable inventory of distressed properties and foreclosures to choose from.  Furthermore, the situation has decreased the market value of almost everyone’s home.

A Realistic Approach

Buyers have become more savvy and selective.  With a huge inventory, desperate sellers, declining appraisals, and excellent terms, everything appears to be “on sale.”  However, don’t get caught up in the frenzy, use some common-sense and logic.  Think of your decision as a “rent vs. buy” one.  When investors look for property they think in terms of ROI (return on investment) equations.  Perhaps homeowners should use this approach.  Calculate the fair market rent value of your prospective home and see if the purchase makes economic sense.  Be sure to include major items such as mortgage payments, taxes, insurance, repairs, maintenance, etc.  Compare the overall monthly cost of ownership with the cost of renting.  Remember there are tax benefits to ownership (e.g., deductions for mortgage interest and taxes.)  Run the numbers. Could you rent your home for more than it costs?  Could it become an “income property”?  If so, your purchase makes sense from an economic standpoint.

The Intangibles  

Buying a home is not strictly a dollars and cents decision.  It’s certainly important to recognize the emotional component and not adhere ONLY to the cost-benefit, and rent/buy calculations.  However, economic factors are important, so weigh these considerations too.  A home may not be an investment but it could turn out to be a smart purchase.

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