Homeownership questioned by growing number of skeptics

American Home

The actual value of homeownership is being questioned by a growing number of skeptics. Image from Wikimedia Commons.

One of the longest standing hallmarks of the “American Dream” is becoming a homeowner. However, a growing number of skeptics are beginning to question whether it is actually a good idea for people to buy a home at all. There is some evidence that could support home-ownership skeptics’ argument.

 

Housing prices may not perform that well as investments

There are a number of experts within the finance industry that are coming to seriously question the long-held assertion that owning a home is a good investment, according to USA Today. In 2000, highly influential Yale economist Robert Shiller, for whom the Case-Shiller Index is named, released a book in which he looked at home values from 1890 and 1990. After adjusting for inflation, Shiller found that home values had barely moved at all in terms of real value. Former Federal Reserve economist Jack Francis found that stocks on the Standard & Poor’s index yielded an average return of 11 percent, but real estate yielded only 6 percent. Given the fluctuations in real estate values during the past several years, it would seem plausible that not as many people are realizing that much of a profit.

Prices and equity plunging

Overall home prices have been plunging since 2008, and the decline has not slowed drastically as yet. Home sales and home prices both declined in February 2011, according to Reuters. Existing home sales declined four percent during February 2011, and home prices declined 5.2 percent between February 2010 and February 2011. A more disturbing, but less prominently disclosed statistic in the press is the amount of equity the average homeowner holds. In the most recent “Flow of Funds Accounts of the United States” release by the Federal Reserve, the average household was estimated to hold 39.5 percent equity in the family home as of September 2010.

Old model breaking down

A home paying off as an investment depends on a lot of assumptions that cannot necessarily be taken for granted. If a person buys a home with a 15 or 30 year fixed rate mortgage and pays the mortgage off, the homeowner has property free of encumbrances that is not costly to live in and can be sold to raise a retirement nest egg. However, few families occupy the same home long enough to accomplish that task. Also, if a person sells a home for a greater price than it was purchased for, that profit may actually be nullified. Costs such as home repairs, property taxes, real estate agent fees and closing costs can add up to thousands of dollars, and very quickly. Furthermore, a home can be repossessed or foreclosed on by the mortgage loan lender if the home owner defaults on the mortgage. In comparison, stocks, bonds and mutual funds only have to be kept until they appreciate in value.

Sources

USA Today

Reuters

Federal Reserve on household holdings (PDF – Requires Adobe Reader)

Federal Reserve Flow of Funds Accounts report

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