Buying a House isn’t an Investment

My business has been anchored to Real
Estate for forty years. It was hard to walk away from a life time
career, but well worth it. The overall picture of property pricing is
clear today where it was pretty muddy for the past the past four years.
These are just some thoughts on the subject of buying a home, versus
renting, and have more financial flexibility. 

Robert Schiller of the Case-Schiller Index, made some comments this
week about Home Ownership as an investment on Bloomberg television:

“Despite the fact that house prices crashed, wiped out millions of
landowners, and wiped out the illusory equity of an entire generation,
people persist in believing owner-occupied housing is a good investment.
Most people believe house prices appreciate 5% to 10% or more each year
and by simply owning real estate they can become wealthy. It doesn’t
work that way. Over the long term, house values increase with wage
inflation as buyers bid up prices with their increasing incomes.”

People have been throwing around the term inflation since the 1980s.
We saw a spike in interest rates as a response to that inflation, but we
have had falling interest rates ever since.  In the 1990s we saw real
wage inflation while it took a while for prices to catch up. Housing
prices were especially attractive until about 1998. From 1998 to 2008 we
saw one of the biggest prices increases in housing prices ever.

That sounded like good news until we had a global housing market
crash in 2008. The United States government was the first government to
step in to prop up banking, and in turn the price of property. Interest
rates have fallen rapidly since 2008 which gives the illusion of home
price affordability. Today the affordability rate for housing is the new
selling point.

The affordability rate and the comparison to rents go hand in hand in
the illusion that home prices are rising. Rents are rising because we
have low supply of rental units. Between 1998, and 2008 we had very few
apartments built because builders made more fast cash by building, and
selling single family units. Many of those went into foreclosure and are
just now coming back onto the market as rentals. There will be a point
when the rental housing market hits equilibrium, and rents will have to
compete for good renters, once again.

The rents are an important factor in determining long term price
increases. The consumer can only pay so much per month for housing. It
depends on the growing debt load of consumers, but there are also a
growing number of people who deleveraged by sending property back to the
bank. There is an increase in renters, but we are also seeing pent up
demand for buying. People in bankruptcy or foreclosure can buy again in
two years, seven years from 2008.

You can work the numbers out for yourself. This isn’t a full analysis
of housing prices, or where rents are heading, it’s just a statement
that all things considered it is now a better time to rent.  There is no
reason to take on hundreds of thousands of dollars in debt on a housing
unit that is sure to lose value in the short term, and has little
chance of giving a return on your investment of a mortgage payment.



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