Five Reasons Owning a Home is Not The Investment it Used To Be

This article was last updated on September 22

Thanks to the housing crisis, many fundamental truths about owning an home have come under question. For example, owning a home was considered a key plank towards financial freedom and along with 401K/IRA retirement plans was the best way to build financial security over the longer term. Similarly a popular adage was to buy your own home instead of rent an apartment, because you were throwing money down the drain or just paying off your landlord’s mortgage. But with falling home prices, expired government home buying incentives and an increasingly uncertain economic future, here are five reasons why buying a home may no longer be such a great investment in one’s financial future:

1. Renting is cheaper – in most locations around the county, rents represent about 50-80% of the cost of buying the property.  For example, a $200,000 home would cost you about $1,800 a month to own (including mortgage, taxes, etc.), whereas the rent for the same house would range from $900 to $1,440. This doesn’t include the much higher maintenance costs associated with a owning a home (next point). Even taking in to account the mortgage interest tax deduction purchasing the house can be several hundred dollars more expensive each month. Bottom Line: In a flat or low growth housing market renting is cheaper and a better financial option for most.

2. Maintenance – the home owner is responsible for all the major maintenance of the house (e.g., big ticket items, like furnaces, new roof) and the renter is only responsible for basic upkeep.  As the housing stock gets older in America, bigger maintenance bills are coming. So unless you are able to shell out a few thousand dollars every year at short notice for the upkeep of your home then renting could be the better option.  Bottom Line: Owning a house can be costly over time and unless the home price appreciates, you are throwing money down the drain. Particularly when other asset classes (stocks, bonds) are offering better returns.

3. Lack of appreciation – In the “good” old days, you could count on 4-10% appreciation almost every year (consistently).  Now, housing could remain more or less flat for several years, maybe decades.  Plus, with the new restrictions on mortgages, demand for housing may never return to the boom levels seen between 2000 and 2007.   Bottom Line: Housing prices follow the economy and the economy is simply not looking positive in short to medium term.

4. Baby Boomers – As the population ages, they will be selling their “McMansions” and buying condos in Florida and Nevada that offer the services (and weather) that aging folks crave.  There will likely be a significant number of existing homes in the Northeast/Northwest/Mid-Atlantic that come on the market over the next 10-20 years.  As the Baby boomers were the largest population group in 20th century, it is unlikely that Generation X, Y or Millennium will have the numbers (or income) to absorb all these houses that hit the marker. Bottom Line: The biggest portion of the population is older Americans – individuals, who will not want to stay in their big, high-maintenance, houses when they retire. Following Econ 101, when supply is greater than demand, prices fall. Would you invest in a falling asset?

5. We move around a lot – The average family stays in their house for about seven years.  Buying a home, getting a 30-year mortgage and paying it off is often the America Dream.  But the reality is that most people either move because they want to or are forced to because of a job.  You tend not to build a lot of equity in seven years and when you do sell you end up losing a big chunk of that equity with sales and agent fees.  Bottom Line: Housing is a commitment that is difficult to see to the end as the workforce becomes more mobile and global.

Buying a home is likely the biggest financial decision for most. But don’t let emotions drive your decision (yes it feels great to be a home owner) and instead run the numbers. You may find that renting is in fact a better financial move, even over the long term.

What are your thoughts? Is owing a home a smart financial move?

One thought on “Five Reasons Owning a Home is Not The Investment it Used To Be

  1. You say I shouldn’t buy a house “particularly when other asset classes (stocks, bonds) are offering better returns.”
    Uh, you do know that the Dow hasn’t budged in a decade, right? And that 10-year bonds are at a historic nadir, barely above 2%?

    Point 1 is invalid. I’m not sure what county you’re talking about, but in mine (Clark, Nevada, epicenter of the housing bust), rent still pays a guaranteed -100% rate of return. And where did you get your rent figures (50-80% of the cost of owning a property) from?

    There are plenty of statements in this post, but no supporting documentation. When did houses ever consistently appreciate by 10% annually, over a period of longer than, say, 4 years?

    You talk about “McMansions” as if they’re commonplace. People rich enough to live in mansions aren’t going to move to condos in Florida when they get old (they’d have done it already, and presumably moved into something bigger than a condo.)

    You’re attributing the conditions of the cumulative, national market to every neighborhood. So there’ll be a glut of houses in the Northeast over the next 20 years? Then by your logic, a house in Florida seems like a pretty good investment.

    “The biggest portion of the population is older Americans”
    What does that even mean? How do you define it?

    What I got out of this post: homeowners have to pay for their own maintenance, renters don’t.

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