13 March 2007
Thought, word and deeds
Earlier this year, Francis W. Porretto caught some flak for suggesting that one's home is not the gold-plated asset it's made out to be, in terms as unambiguous as this:
[A] house must be regarded as a consumption expense, not an investment. For young persons overwhelmingly likely to need (or want) to move within a decade of the purchase, it's a particularly bad deal.
The Wall Street Journal has now weighed in with a similar argument, plenty of which was quoted by Burbed.com, as follows:
For the grasshoppers, there's nothing quite as stupid as paying off your 2002 trip to Orlando in 2032, when you finally settle up your refinanced "cash out" 30-year mortgage. And for the ants, economic studies have demonstrated over and over that houses (1) cost more than most people make when they sell and (2) rarely match the long-term returns of stocks or other investments.
It may be late for a lot of homeowners to read this, but here it goes anyway: It's risky and bad planning to have too much of your net worth in your principal residence. No prudent stock-market player would put 60% or 70% of a portfolio in just one stock, but millions will hold that much or more of their total net worth in just one house.
(Disclosure: At the moment, I fall into this bracket. On the other hand, no one has accused me of being a prudent stock-market player, and anyway, the rest of the portfolio is going up faster.)
And, yes, there's this:
When most homeowners figure their returns, they donít do much more than subtract the price they paid from the price they received. Then they come up with a really big return because they paid only a 10% or 20% down payment. So they figure they made a huge "profit."
But they didn't. Thatís because the costs of owning a home buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it sap most of what most homeowners think they make in price appreciation.
And woe betide those who live in housing markets in decline.
Says the Burbed fellow, perhaps tongue-in-cheek:
If you don't have a mortgage, you're not driving up property prices. And if you're not driving up property prices, you're hurting your neighbors by preventing them from extracting equity to pay for college for their children.
Why do you hate our children, WSJ?
I'd call this "food for thought," but I'd probably never get back the investment in the kitchen remodel.
Posted at 10:08 AM to Common Cents
It is kind of depressing when you think about it like this, but what options do we really have? Pay rent, and let someone else be responsible for the water heater if it breaks, that could be a viable option.
However, we can pay rent the rest of our life on someone else's property, but if we pay on this house for 30 years (ugh) then it is ours, and it is kind of nice to think that our daughter may always have a home if she is smart enough to hang onto it.
I admit I don't know what else to do.
I have no regrets signing on the dotted line; having spent too many years in too many crappy apartments, I'd have done this anyway, whether I break even on the deal or not.
The biggest problem with buying a house is the long-term mortgage. Anyone who can manage the payment schedule should look into a shorter term -- even just a 15-year mortgage can mean big savings down the line.
Of course, it was easier to swing the right payments when interest rates were lower.
When I bought my house all I could get was a 30 year FHA mortgage. Six years later I refinanced to a 15 year Conventional mortgage at a fixed rate 2.125% lower. Granted the lower rate helped a lot. The payment isn't that much more and you make a lot more headway on a 15 year term. It is really nice seeing "11 years 2 months" left instead of "26 years 2 months" :)
It's not absolute insanity to want to own your own home. It's just necessary to keep in mind that it's a consumption expense rather than an investment. Given the size and duration of the mortgage commitment, it's one that most young couples, who need their mobility more than they need a yard or a basement, should avoid.
I own my own home, and have lived in it for 27 years. (Yup, the same home.) I bought it for $72,000 in 1980, and have plowed more than $130,000 into maintenance, insurance, and improvements since then. At this time, the total of my mortgage / interest / property tax payments to date is just a hair under $400,000. So I've spent about $530,000 on it, which is considerably more than I could sell it for. (Current appraisal: about $325,000)
That $130,000 figure might strike you as atypical. But think about it: it's less than $5000 per year, or $400 per month. A lot of families spend more than that on their electricity alone.
But the worst part of home ownership, for me, is this: it's kept me on Long Island. In 1984 I had a stunning offer from a Los Angeles firm, at more than twice my salary, that I declined because I couldn't bear the idea of selling my house! I could have been a Californicator, lazing in the endless sun, with my arm around a blonde bathing beauty instead of...oh, hi, sweetie. Done with the corned beef already? Of course I'll take care of the dishes!