In the past, homeownership was a goal to aspire to, and owning your home was a sign that you had made it. Today, some would say that buying a home is a bad investment. Are they right? Before making your homeownership decision, you'll need to separate fact from fiction.
Homeownership is not for everyone
Homeownership has a downside. But that's not really news; owning a home has never been appropriate for all people, at least not all the time. Not even in the '50s, when Dad came home from work to a wife, a tidy home, dinner on the table and 2.2 kids. Not even then, when homeownership was rising sharply.
The homeownership rate in this country languished below 50 percent until well after the Great Depression. A booming post-World War II economy, favorable tax laws, a rejuvenated home-building industry and easier financing (FHA loans, VA loans and Fannie Mae home loans) caused homeownership to surge nationally, exceeding 60 percent in just two decades. It remained near 65 percent until subprime mortgage availability and low mortgage rates pushed homeownership to a record high of nearly 69 percent in 2006.
Proponents of subprime and low-document lending extolled the accessibility of homeownership to more people -- adding that extra 4 percent of households. In the wake of the foreclosure crisis, however, many attitudes have changed. Opening up homeownership to those unable to save a down payment, prove their income or handle regular mortgage payments were some of the mistakes that triggered the housing bust.
Nowadays, borrowers with poor credit or those who have a hard time managing regular monthly payments will have a more difficult time obtaining mortgage financing. Outside of the FHA (VA, USDA and local down-payment-assistance programs), mortgages are largely off-limits to those unable to save even a small down payment, and today's mortgages aren't available to those who lack job security or emergency funds. Homeownership is generally not a great idea for the financially unstable. It goes without saying that buying and selling homes involves real estate commissions, lender fees and title charges.
Running the numbers
Conventional wisdom says that renting is cheaper than owning, and higher rates of return on investment can be realized by taking the money saved by renting and putting it in the stock market. That can be sound advice if two assumptions hold true.
- Renting must be cheaper in your market than owning. According to Credit Suisse, renting has become more expensive than owning real estate in many U.S. markets, particularly those that suffered the most damage to home values in the past few years. So before you can decide how to invest the savings realized by renting instead of owning, you need to determine if there would be any savings to invest.
- Returns on equities or other investments must exceed returns on real estate investments. A sour economy takes its toll on both. For example, house prices in the U.S. took a hit of over 30 percent from the height of the real estate boom in late 2006 to its bottom in late 2009, according to the Case-Shiller home price index. This prompted many to avoid real estate investing. However, from October 2007 to March 2009, the Dow Jones Industrial Average fell from its record-high close of 14,164 to 6,547 -- over 50 percent (although it has recovered about half that loss already).
Homeownership in 2010
Working in homeownership's favor today are some of the lowest housing prices in years, coupled with some of the most favorable mortgage rates in history. Homeownership also offers the benefits of what budget analysts call "forced savings." While paying for the roof over your head, you pay down your mortgage and build wealth. For those who lack the discipline to live debt-free and save the hundreds of thousands needed for a comfortable retirement, home equity may be their only source of security in their old age.
The federal government has studied homeownership in great detail and has concluded that it is even more beneficial for less affluent families.
....homeownership has become a critical factor in moving up the economic ladder. Home equity is the largest single source of household wealth for most Americans. Median net wealth for
homeowners exceeds $78,400, while renters accumulate less than $2,300, or 3 percent of this amount.
Owning your home may be the only way to live where you want. Some communities have limited or no rental opportunities. In addition, owning your home may provide the freedom to have the pets that you want, paint your home the colors you like, hang your art on the walls or plant a garden. Owning your own home frees you from the control of a landlord, who may choose to inspect your home at his or her convenience, raise the rent or sell the property.
So, the decision to own or rent must be arrived at with both your heart and your head. You can analyze the figures by using a rent vs buy calculator. You can dream about the life you see for yourself and determine if homeownership should be part of it.
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