It's a home, not an investment
Owning a home is a 'lousy investment.' Young people should fund their retirements instead, professor maintains.
This post comes from Marilyn Lewis of MSN Money.
There's an avid conversation going on at The Wall Street Journal right now. Readers' responses to an academic's opinion piece, "A home is a lousy investment,"are pouring in with about 450 comments so far.
The article's premise is simple: Young people shouldn't buy a home thinking of it as a good financial investment. Maybe they shouldn't buy a home at all.
The writer, Robert Bridges, professor of clinical finance and business economics at the University of Southern California's Marshall School of Business, goes further:
Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both.
With Social Security cuts looming, "income self-sufficiency" will have to be their priority. Bridges says. He continues:
Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.
This may seem obvious to some people. Personal-finance advisers have been telling clients for years, through boom and bust, to enjoy a home but not to consider it part of an investment portfolio. Paying off the mortgage leaves one less bill to worry about, but it's not a cornerstone of retirement investing. (Try this MSN Money calculator: Am I saving enough for retirement?)
Most of us have heard this and at some level we accept it. Yet, a familiar aphorism -- "Owning a home is one of the best ways to build long-term wealth" -- is also buried deep in the national psyche. An online search of the phrase yields 5,160 results, many from real-estate sites. Post continues after video.
Bridges analyzed 30 years worth of California home price and ownership data and concludes:
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
In other words:
If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.
Bridges doesn't say whether an investment in a home outside California would have yielded a different result, although he addresses his advice and conclusions generally, to everyone.
This is tough medicine for some of us, as attached as we are to our homes.
Even the traditional idea of homeownership as an enforced savings plan is undermined by the ready availability of home-equity cash, writes James Surowiecki, in a 2008 article at The New Yorker magazine: "People are using up their home equity instead of saving it for the future."
Reader responses to the Journal article range widely but many wrote in to disagree with Bridges. Sumeet Raina says:
You also need to consider the quality of life. To rent an equivalent home has always been . . . a lot more expensive than paying mortgage on a similar property in the 4 cities that I have lived in past.
Reader Alex Yuriev makes an intriguing point:
Government loves homeowners . . . Wait I meant to say home-debtors. Nothing makes one a sucker for collecting taxes and fees as owning illiquid asset that is a significant portion of one's net worth . . . .
Steve Fowler puts in:
Well, that depends, doesn't it?
If we continue to print money and run unsustainable debts, the smart money is not in money. If you have a house, and maybe even a little bit of land, then at least you have something.
Reader Stephen Walker takes issue with Bridges' math:
I'm not seeing how a 20k investment 30 years ago at 6.61% becomes 1.8M, even if you count the upkeep expenses. That same person would also have to pay for housing somewhere else. I would certainly give you 20k today for 1.8M in 30 years, would you be willing to make that deal?
Readers return again and again to the current housing debacle. Frank Seldin doesn't advocate this but, he writes:
PS -- the way foreclosures and delinquencies have come to be treated, homeownership has become more attractive. If I buy stocks and lose money, I'm stuck with the loss. But in today's environment, if I buy a house and my mortgage goes underwater, I may be able to walk away from the loss (not to mention I may be able to live there mortgage free for 1-3 years before the bank can foreclose).
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