Should You Own Your Home, or Not?Submitted by HearthStone | Private Wealth Management on August 18th, 2015
APRIL 13, 2015
Should You Own Your Home, or Not?
Home values are rising again. The question on many peoples’ minds is, “Will they continue to rise?” However, the question that should be asked more often is, “Should I own my home, or not?”
Jan Schalkwijk, CFA, at JPS Global Investments, recently asked whether owning your own home is a good long-term investment. In his recent newsletter he says, “Is it really true, or is [the belief] just perpetuated by behavioral biases that filter out all evidence to the contrary?” This is a relevant question because the family home is the single largest asset for a majority of American households. [Source: JPS Global Investments, Summer 2014 Newsletter].
First, let’s agree that the family home is more than just an investment. It is very difficult to detach the home itself from the experiences and emotions of the people who enjoy the use of it. Aside from the emotional attachments of home ownership, how does owning your own home work out in the end as a pure investment?
here is abundant evidence that owning a home solely as an investment simply does not pencil out. In his article, “Five Things Your Need to Know Before Buying a House,” author, pundit and successful Wall Street guy James Altucher rejects the home ownership mantra. When Altucher does the math, he finds that “It's plain that it is one of the worst investments you can make.” [Source: “The Worst Investment You Can Make: Buying a Home,” Brian Lund, Investor Center, 2014].
Consider a $350,000 house—slightly over the current average U.S. sales price. In most cases, the buyer puts 20 percent down, or $70,000. This leaves a loan balance of $280,000 and a monthly payment of $1,853.10 (assuming a 30-year fixed rate mortgage at 4.5% interest).
At the end of 30 years, total payments would be $667,166 in principal and interest—$387,116 more than the original loan amount. Property taxes would add another $126,000 (assuming taxes are 1.5% of the original value. Maintenance costs would add to the total, but will be ignored for simplicity).
Altucher concludes by suggesting that one should rent for 75% of what the mortgage payment would be and invest the difference.
Wall Street Journal columnist Jonathan Clements concurs. In his column of August 24, 2014, he writes: “You are highly unlikely to make money from your home’s price appreciation once you figure in inflation, homeowners insurance, maintenance and property taxes. If you have a mortgage, the interest costs will likely offset the benefits.”
Mr. Schalkwijk refers to Yale economist Robert Shiller, a winner of the Nobel Prize and authority in the field of real estate economics. Mr. Shiller’s assertion is that: “From 1890, a mere 25 years after the Civil War, until 2012, U.S. home prices adjusted for inflation have not moved. In comparison, the stock market has increased 2,000 fold over that time period, adjusted for inflation.” [Source: JPS Global Investments, Summer 2014 Newsletter].
There are exceptions to every rule. Many home buyers have owned their own home and it’s been a good investment—the best of both worlds.
As said, a home is more than an investment. It offers experiences that transcend a mere pragmatic investment: watching your children grow up under the same roof, family reunions, planting a thriving garden, and more. Such experiences are valued in other ways.
Our goal is to educate and empower people to make intelligent decisions. Challenging common beliefs with factual analysis is part of that process. Owning your own home may or may not be a great investment. Yet, in the end, the most important thing is that you can sleep better at night knowing all the facts.