The SCOOP! Blog by® 'Stress-Free Mortgages'

How To Think About Investing In Housing

June 6th, 2017 5:04 AM by Jackie A. Graves

Is housing a bad investment like some economists allege? Everyone's circumstances differ, so obviously I can't offer a broad endorsement. For a variety of people, and for a variety of reasons, buying a house can be a bad investment decision. That said, I am probably more pro housing as an investment than the median economist. Here are a few reasons why.

To start, you sometimes see people refer to housing as a bad investment by comparing it to S&P returns. This is not a useful comparison for multiple reasons.

First, owner occupied houses pay a significant annual dividend in the form of free rent. According to Zillow, the average price to rent ratio in the U.S. is around 11, meaning that around 1/11th of the value of a house is saved each year in rent. If you stay in a house for 11 years, you save the equivalent of the price of the house in rent.

Second, lets pretend for a minute I believe this argument that the S&P is a better use of my money. Okay, Robert Shiller, thanks for the tip. I'll just head down to the local bank and borrow $300,000 at a 4% interest rate to invest in the S&P to get those better returns. See the problem? The stock market may get better returns, but nobody is going to lend you money to invest in stocks and let you put only 5% down. Part of the reason they'll loan you this is thanks to the federal government, without whom 30 year fixed-rate mortgages wouldn't exist. But without the government involvement you could still borrow a lot of money on fairly generous terms because banks know people don't want to lose their homes and in most cases have to pay a rent no matter what. In any case, from an individual perspective it doesn't matter why you can borrow so much for so cheap, just that you can.

Finally, I wonder what housing investment skeptics Robert Shiller thinks of people who make their livings as landlords. How does this irrational, money losing market exist? After all, if you can't make a profit by buying a home and renting it to yourself, how is a landlord supposed to?

Owning a home is like being an entrepreneur. It takes work and there is risk. You have to look at rents, prices, maintenance, taxes, and the risks, including the risk of being locked into a specific place if you lose your job.  But it is much less work and risk than the average entrepreneurial venture. The small business failure rate is quite high, after all. And if you are smart about it you can make a profit, just like your landlord will if you decide not to make the investment.

The average economist seems unwilling to say this, probably because there are a too many people who regard buying a house as a free lunch without considering the risks. But just because too many households fail to accurately assess the investment does not mean we should exaggerate to make it look worse than it is.

By Adam Ozimek - To view the original article click here

Posted by Jackie A. Graves on June 6th, 2017 5:04 AM


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