Each Thursday for the next five weeks I am going to take one of the five dumbest reasons people use to explain why you shouldn’t buy a home today. We will start today with:
Dumb Reason #1: Real Estate is no longer a good investment
There is no doubt that houses in this country have lost substantial value over the last five years. We could make the argument that the purchase of a home should not be looked at as a financial decision. However, that would just embolden those who make this argument. We will, instead, take this subject on directly.
The naysayers love to shout:
If you think real estate is a good investment, ask someone who bought in 2006.
They are 100% correct. People who bought a home in 2006 and need to sell it today could lose as much as 25-30% of its value.
However, a person who placed money in the Dow in 2007 and sold it in January 2009 would have lost 49.3%. Even if they sold today they would still be at a 26.7% loss. Does that mean that we should never again invest in stocks?
If someone bought gold at the end of 1987 and sold it in 2000 they would have lost approximately 50% of their investment. I am sure there were people in 2000 who decried gold as an investment when it dropped to almost $250 an ounce. I hope people didn’t listen as gold is now trading for over $1,200 an ounce.
It bothers me when people look at just the monetary price of a home. Its value is so much more than that. Your house provides shelter and a place to spend time with friends and family. Yet, your home also is expected to provide a return on investment. What other big ticket item that we buy do we expect that from? We don’t expect cars to appreciate. We don’t expect a boat to appreciate.
But, if a return is what you are looking for, let’s compare housing to the stock market. Not in short term intervals but over the long run. Here is the percentage return you would have on May 31, 2010 if you invested money in each of these instruments on January 1, 2000:
Real Estate was the best investment even throughout one of the most difficult decades in American homeownership.
We will cover Dumb Reason #2 – Renters are happier than homeowners next week.
We want to thank our friends at KCM blog and Steve Harney for this post.
Excellent article. I know you are aware of this Josh, but I just wanted to add a little clarification to the difference between “Appreciation Rate” and “Return on Investment(ROI).
1) Appreciation: (The % increase from original purchase price)
As stated in chart: 43.4%
EXAMPLE: We purchased our home in 1996 for $210,000, today its worth $380,000(2yrs ago it was appraised at $420,000). After 2008 & 2009, my home still appreciated at an average rate of 8.1%.
2) Return on Investment:(The amount of money invested)
EXAMPLE: Our home appreciated $170,000 divided by our “larger than usual down payment” of $75,000 = 227% in 14 years or 16.21%.
(I could have put that $75,000 in the Stock market, so it’s a fair comparison)
LET’S COMPARE TO TODAY’S VERY POPULAR FHA LOAN WITH ONLY 3.5% INVESTED:
1) Appreciation: Buy a $210,000 home today. In 10yrs, estimated value with an “average” increase of 43.4% = $301,140
(Using this average would mean the price of homes double every 23 years..hmmmm….OK!!)
2) $210,000 Purchase Price x 3.5% down = $7350 divided by $91,140 (increase in value over 10yrs) = 1240% return…YES, That’s right….
ONE THOUSAND TWO HUNDRED AND FORTY PERCENT RETURN….A $7350 investment created $91,140 in equity.
OK, so there are expenses involved in homeownership that a renter doesn’t have to worry about. CUT IT IN HALF THEN….$670% I didn’t even take into consideration the tax benefits involved……”EYE’S WIDE OPEN?”