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Well, Duh

July 12, 2011

Robert Bridges has an article in the Wall Street Journal, and it’s not surprisingly titled “A Home is a Lousy Investment.”  Check the title of my post for my response.

Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.

So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.

I realize, especially having “done time” in California how much people thought that their homes would be gaining over time.  I also saw it once I moved to Oregon.  Especially in Central Oregon, many Californians took equity out of their homes and used them to put down payments on houses in Bend and the surrounding area.  They viewed it as a “diversification” strategy that enabled them to gain on property in both places.  After the market started to decline, they did a fire sale on the vacation homes, which tanked the market.  On top of Deschuttes having one of the higher unemployment rates in the nation, this served to completely depress the area.  As a note, it does make for values when someone wants to buy a vacation home… just don’t consider it an investment in anything other than your sanity.

I say this as a person who’s spent heavily on property in various areas in the last few years.  But I didn’t do it to make money.  The fact that I’m still positive is a nice touch, but I didn’t plan to get rich on my property.  In fact, my wife and I recently paid off our last mortgage… which makes this particular passage a bit confusing to me.

There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it’s likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets.

I agree with Mr. Bridges’ assertions at the end of the paragraph.  The value of a home is not the ability to tap the equity.  I disagree with the first sentence, though.  My financial security has increased significantly given that I don’t have to pay any mortgage, rent, or other base housing expenses.  I don’t plan on re-loaning myself the money, or any other weird investment strategy.  I plan on living in my house, and saving or giving the money that I’d otherwise be putting to the payment.

I’d recommend you read the article, because it has many good points on ways to not use a house as a bad bank account.  That said, I think it misses the point of the real security of a paid-off home.

2 Comments leave one →
  1. July 14, 2011 9:35 am

    Maybe it’s more a perspective than a return calculation.

    I’ve always assumed that my earning power would go down (by choice, and/or by retirement or refocus). If, in that space, I could acquire a place to live in a style that I like, then the value of owning it vs. renting it would be greater… assuming I could truly own it.

    I agree w/ your analysis. In terms of what you pay into a house, including the interest, it’s much better on a yearly basis to just rent. It’s the longer-term considerations that vector me to property ownership.

    But it’s certainly not a money-making scheme.

  2. July 14, 2011 3:40 am

    Well, the one problem with such appreciation rates (which have been pretty close to 6% for most of a century) is that you are not investing 100% dollars into the home. Instead, it is gaining at 6% (pre-Obama, anyway) while you’re using money to pay the mortgage that would have otherwise gone for rent. So the proper comparison would be rent versus mortgage in terms of ROI, right?

    And if someone ELSE’s rent pays the mortgage, better yet. At least, once Obama is gone.

    ===|==============/ Keith DeHavelle

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