To Buy or Not to Buy: The Difficult Housing Question

Owning a home has always been an integral part of the “American Dream.” With housing producing double digit gains in the early part of the 21st century, purchasing a home seemed like a no brainer. Credit was made available so openly that nearly anyone who had the desire to own a home could make their dream a reality. No we are living through the consequences of a collapse of not only the housing market, but a recession that is unlike anything else that we have experienced in the last 50 years.

During the height of the housing fueled bull market over the last 3 or 4 years, large investment firms and banks alike started taking risks that leveraged debt at more than THIRTY times earnings. That is the equivalent of someone making $50,000 a year walking into their local bank and asking for a $1.5 million dollar mortgage with no other assets. Clearly, much of the logic and fundamentals that our financial system was built on were ignored and now the road to recovery seems as unclear as ever.

So with the economy’s future uncertain, is it still a good time to own a home? Conventional wisdom has taught us that renting is “throwing your money away” and that owning a home is “the key to building long term wealth.” On the surface, this seems like a logical argument. However, especially in the current economy you may want to rethink this investment. A recent article in Business Week entitled, “What Will This House Be Worth In 2012?” puts the true cost of home ownership into perspective. The National Association of Realtors identified the median home price at the end of the 4th Quarter of 2008 at $180,000. This is down over 20% from 2007, and the NAR expects the median price to drop another 16% in 2009. Current forecasts estimate that GDP will decrease at 3% for 2009 for the first annual loss in GDP since 1974. Current projections suggest that the economy will rebound in 2010 with a modest 1.4% GDP growth rate and be back to 5.8% in 2012. What does this mean for home prices? Well in 2012 the median home price is estimated to be $179,000, just shy of what it was 6 months ago.

If that is not enough to make you rethink the values of home ownership, consider this. Most economists estimate that the historical gain from housing since 1950 is somewhere between 1% and 3%. That is hardly a lot to write about, let alone retire on. In addition, the “real cost” of home ownership factors in several variables that aren’t always visible on the surface. First, owning a home requires a lot of maintenance. If you don’t have the skills of Ty Pennington and the rest of the Extreme Makeover team, maintenance, repair, and improvement costs can take a huge chunk out of any gains that you make on the home. Second, during the first 20 years of that 30 year mortgage, over 50% of your mortgage premium is dedicated to paying off interest. From a savings perspective, that is perhaps the worst savings vehicle on the planet. Not only that, but you aren’t able to tap into that savings without selling your home or taking out a home equity loan that charges you to borrow your own money. Third, many people sacrifice valuable time in their efforts to own a home. If you work in a major metropolitan area, chances are that you purchased a home in the suburbs for a variety of reasons. However, the real cost of commuting daily is more expensive than the extra dollars you shed at the gas pump. Owning a home more than 30 minutes from your work presents a difficult choice. It often means sacrificing either the time that needs to be invested in your social and professional network to succeed or sacrificing the time with your family at that home in the “burbs.”

Owning a home is definitely more than just a financial decision. Mortgage rates are still historically low, although they will probably remain higher than recent years because of a variety of economic factors ranging from long term bond yields to the increased pressure that banks have to make good loans in the current economy. If you intend to remain in your home for the next thirty years, owning a home may still be a way that you can be certain that you have a substantial sum tucked away when you retire. Otherwise, you may want to consider “throwing your money away” in some other fashion, like the stock market. Even in the recent downturn, Pfizer has a 16% gain over the last 50 years. This is only one example of many companies that have withstood the test of time and very well might offer a more solid retirement in the years ahead.

Image credit: Colin

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