The days of homebuying as an investment opportunity are long gone
A home mortgage was known as “the most important investment a person ever makes” for decades. Then the housing crisis arrived and long overstayed its welcome. Overinflated home values soon became artificially low home prices. Home sales are at their lowest level in 15 years. Falling home prices are raising concerns about deflation. A Federal Reserve official recently said it was a mistake to look at buying a house as an investment opportunity. One financial expert advises that when it comes to housing, people shouldn’t confuse an expense with an investment.
Why housing is no longer a good investment
Real estate experts believe home ownership will never again generate wealth like it did in the second half of the 20th century. The New York Times reports that the inventory of homes for sale may soon rise to a 12 month supply — twice the level of a healthy housing market. As all those sellers compete for buyers, home prices will continue to fall after already losing as much as 30 percent in value. Dean Baker, co-director of the Center for Economic and Policy Research, told the Times it will take 20 years to recoup $6 trillion in housing wealth lost since 2005. Adjusting for inflation, home values will never catch up.
Housing has become a living expense
Treating a house as an investment is the biggest personal finance mistake a person can make, according to Charlie Farrell at CBS Money Watch. Farrell said housing should be looked at as a lifestyle expense like buying a car. A house is a depreciating asset, just like a car. It falls apart unless money is constantly pumped into it. Economists say in the next 20 years home values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment in the mortgage. Even when the mortgage is paid off, paying maintenance costs and taxes on a home means owners will have put more money into houses than they get out of them.
Getting a mortgage: having something still better than nothing
In the aftermath of the housing bubble, the U.S. housing market is the last place people should put their hard-earned money, according to Thomas Hoenig, president of Federal Reserve Bank of Kansas City. During testimony at a hearing held by the House Financial Services Committee’s oversight and investigations subcommittee, he said “If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake.” Linda Stern, Farrell’s colleague at CBS Money Watch, said Hoenig is right, but it could still be a good idea to lock in the price of a depressed asset and pay for it with other people’s money at 4.5 percent. Paying rent for 30 years returns nothing. With a mortgage, there’s a house at the end of the tunnel. Regardless of what it’s worth, it’s something.