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