How often over the years have you heard that “owning a home is the best investment you will ever make?”. Well, I am simply going to tell you that it is not and it really never has been. The only time a home was a good investment was when they were bought before the credit bubble and banking mortgage scam of the late 90’s and early 2000’s. During the 90’s, if you could find a house in a good area, and put a minimum amount of work into remodeling or improvements, and then turn around and sell the home during the early 2000’s when banks were giving loans out to anything that breathed and the credit bubble allowed for people to have jobs that never should have existed to begin with, then you could walk away with a very nice return. And that return was based on the overinflated value of your home created by demand which was fueled by a monopoly on credit.
However, that return you got from the sale of your home is only good as long as you keep it in a liquid state. Meaning….cash in the bank. So, if you are going to go buy another home right after selling your previous home, you are now buying a home at the top of the market, essentially losing your return assuming that you sink all of your return into a down payment and possibly more into your next home. This would most likely be the case because you of course would be selling your first home so you could move up, and not down. So your next home is going to be more expensive than your previous. For example, if you buy a stock low, and then sell it at a high price, you aren’t going to turn back around and then use the proceeds to buy another different stock that is overvalued are you? But this what most people did with their homes.
So the only way you really could have truly benefited would to have bought a home in the 90’s. Spend very little on improvements. And then sell it in the early 2000’s for a premium. Then, take your cash and put it into a low risk interest bearing account or savings account. Then go live in an apartment and wait years until the housing market crashes. Then take your cash and buy another home on the cheap. The only way anyone really could have done this, is if they had a crystal ball. Because there is no way anyone can actually time the markets and predict when it will fall. So you would have felt like you were living in an apartment indefinitely while the values on homes kept rising.
But in general, why is a home not really a good investment?
1. You pay interest on your mortgage!! For at least the first decade, the mortgage you carry is front loaded to pay interest and not principal. Go look at your mortgage statement. If you have a $1000 mortgage, only about $100 per month is going towards the principal payoff. The rest is about $900 per month straight to the banks!!! That is $900 per month you will never get back! It will take years before a larger portion of your monthly payment actually goes towards the principal!
2. Eventually you will either have to repair something, or remodel assuming your home wasn’t just built yesterday. Unless you like to do your own work, it will always cost you a $ grand here and there for someone to do any painting or flooring or whatever you need. Aside from that, just about everyone I know that has moved into a brand new home, still had to spend $ within the first 3 years to make additional improvements because the home was built at builder’s grade quality. Bare bones…..cheap fixtures, cheap toilets, cheap exterior paint, etc.
3. So you get that nice tax return at the end of the year right? Well, you still have to pay property taxes anyhow on your house!! That still is $2000 average per year. My parents have a newly built home that is nothing but a regular sized middle class couple type ranch, but they pay $3800 in taxes per year! What a rip off!
4. Don’t forget about that home insurance! Plan on a minimum of a $1000 yearly insurance policy, even for a cracker box house.
My advice to any single 20 something college grad that is looking for housing, would simply be to live the apartment life until they get married one day. They can just make their monthly rental payment and that’s it! No taxes, cheaper utilities, and no home improvement projects. They can put the rest of their month end earnings away into an interest bearing account. One day, if they get married, then they can use their savings for a good down payment and buy a house. Or keep that savings in a low risk security and buy a home with a minimum down payment. But not as an investment, but as a place to raise a family. That’s what a house is for. Homes are not for single people! They are for families. A home is not an investment. It’s a place to live until you retire and then scale down.
What occurred in the early 2000’s was nothing more than an overinflated bubble. My prediction is that housing will NEVER return to the overinflated values they once were at. First of all, there is still a second wave of mortgage failures that are coming on the horizon. This will lead to a greater surplus of homes than there already is and more job losses. With all the new homes built during the past decade and people defaulting and walking away from those homes, there is nothing but a surplus of homes. That means no DEMAND. And it will get worse. As of 2010, jobs still have not returned. Sure, you’ve seen a little tiny return of the stock market, but that’s just stimulus money making its way into the stock market plus people that gone ahead and put their money back in because they are tired of waiting and don’t know what else to do. But, there have been no new jobs. That means no new home buyers other than the “single” types looking to buy on the cheap with the $8000 tax credit. That means that housing will be depressed for years and years.
Is there an upside to looking at this? Well, if you are looking to get out of your home, and you sell on a “down”, then you can go and buy another home that is on a “down” too. So, you are selling low and then buying low which results in a lower mortgage than your current mortgage. Rather than selling high and then buying high. So looking at it that way, your losses aren’t really that big of a deal in a sense. If that precise message could be put out to the general public by the mainstream media, then that might result in more buyers in the market which could help for a “tiny” housing turnaround. But now, you’ve got a surplus of homes, people without jobs, no new jobs created, and people who are “afraid” to buy a house even though they are cheap now.
So once again, homes are NOT an investment. They are four walls that you buy and raise a family in. If your ship comes in and your financial status increases, then you can sell and buy a nicer home. Otherwise, you pay off that home over the years and then you die on the kitchen floor of a stroke at the age of 90 like everyone else did back in the day! Then your children sell it and make off with the inheritance. That’s what a home is!