One of the surprising things about being a personal finance writer is volume of “dear idiot” letters you get. You get used to vitriol when you write about inflation (You idiot! Do you know what a pound of chicken costs these days?) or the Federal Reserve (You idiot! Janet Yellen destroyed this country!).
What surprised me a few years ago was the response I got from what I thought was a fairly milquetoast piece on buying a house. I wrote the story in 2012 and said, basically, prices are still low, interest rates are low, and if you can afford it, this might be a nice time to buy a house.
This produced howls of outrage from people who had bought during the housing boom and were still underwater. And, as they learned, housing boom and bust cycles are pretty long. The housing market peaked in 2006 with the median home price — half higher, half lower — at $154,600, down from a high of $230,900 in July 2006. The median price rose to $177,200 in 2012, and stood at $229,400 at the end of the second quarter, according to the National Association of Realtors. In other words, after nine years, the median home price is nearly back to its 2006 peak. That’s a long time to be under water.
What has changed since 2012? Affordability, mainly. While the 30-year fixed-rate mortgage rate is just 3.86%, the NAR says affordability has declined 23% since 2012. In other words, as housing prices have risen, the number of buyers has declined, thanks to stagnant income and higher prices.
But how good of an investment is real estate? It’s an extraordinarily difficult calculation, but generally speaking: It’s not great, unless you buy at the low and sell in the next frenzy.
Consider this fine 12-room home in Chevy Chase, Maryland, which sold for $17,000 in 1919, according to the wonderful history site, Shorpy.com. It sold in 2014 for $2.4 million.
While this may seem a dramatic price gain, it works out to a 5.35% average annual return during 95 years. It’s certainly beat inflation: $17,000 in 1919 dollars was worth $232,630 in 2014, a 2.79% rate, but lagged the Dow Jones industrial average, whose price, excluding dividends, rose 5.73% per year.
Of course, this doesn’t include the cost of owning the house, starting with mortgage interest and property taxes. But as any homeowner knows, the expenses don’t end there. Anyone who has owned an old house knows that this one was probably lovingly coated with lead paint for half a century. Most roofs have to be replaced every 20 years, so it would be due for its fifth one pretty soon. And there’s a little sensor on the furnace that senses when your savings account is too high and sends a big puff of black smoke out your chimney as the furnace dies.
And if you lose your job, owning a home can be a significant barrier to finding new work elsewhere. Even if good times, moving across country while selling a home is stressful. Moving across country and having to rent out a home you can’t sell is pure agony.
On the plus side, there’s the tax deduction for mortgage interest, which generally allows you to have enough deductions to itemize your tax return. And if you put 20% down, you’re leveraging any price gains. (As people discovered in the 2007-2009 financial crisis, you’re also leveraging your losses.)
For most people, a house is basically a forced savings plan that you can live in. And, while upkeep expenses don’t decrease when you pay off the mortgage, having no mortgage is a wonderful thing in retirement. When you rent, you can look forward to increases all your life — and you still have to ask the landlord’s permission if you want to paint the master bedroom something other than eggshell. All in all, it’s probably better to own, if you can afford it.