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You Can Make Up for Never Buying a Home

NEW YORK (TheStreet) -- A study by Zillow.com finds than 10% of renters would like to buy a home in the next 12 months, a demand that could help speed the housing recovery. But what about the other 90%? By not aspiring to homeownership as soon as possible, are they condemning themselves to financial doom?

Not at all. While homeownership can improve chances of financial security, the key word is "can." It's not guaranteed. Homeownership can backfire.

In fact, many homeowners have a misconception about where the financial benefits of owning come from. It's commonly believed a home is a good investment. In fact, the benefit of ownership comes from reducing the cost of shelter over the long term, leaving the homeowner with spare cash to invest more profitably in assets such as stocks and bonds. The home itself can be a long-term money loser.

In other words, the financial benefits of ownership an be wiped out by owing too much home -- by buying an overly expensive home in the first place, or by constantly trading up.

Among the 90% of renters not likely to buy soon there are many who have sound reasons. Many are young people who will not stay put long enough to break even on a home if it were bought now. Others may feel they'll soon have to move for a job or better schools. Many don't have the cash for a down payment, and many know they can't qualify for a mortgage. And many renters simply prefer to leave the headaches of owning to someone else.

Anyone likely to stay in one home for decades is likely to come out ahead as an owner. With a fixed-rate mortgage, the monthly payment stays the same until the loan is paid off, while a renter occupying the same home would probably have to pay more each year. For the savvy homeowner, the cost of shelter as a portion of income gradually goes down. And, eventually, the loan is paid off and the owner has an asset that can be worth hundreds of thousands of dollars, maybe more. After decades of renting, the renter has nothing to show for it.

But owning does not freeze the entire cost of housing. Property taxes, homeowner's insurance and maintenance costs are likely to go up most years. If the owner is lucky, the overall cost ownership will climb less than the overall cost of renting an identical property, but that's not guaranteed. In some years, big expenses such as a new roof or furnace can easily make ownership more expensive than renting.

Owners do benefit from the rising value of the home over time, but average home-price gains are only slightly above the inflation rate. So a dollar put into a home is likely to grow much more slowly than a dollar put into the stock market, which in many years provides returns 6, 7 or even 10 percentage points higher than the inflation rate. Last year home prices rose smartly, by about 12%, but the Standard & Poor's 500 stock index returned 32%.

That means if you could buy an investment property or an index mutual fund invested in the broad stock market, you'd probably do better with the mutual fund. Buying a home therefore makes financial sense only because, if you must pay for shelter, owning generally pays off better than renting over the long run.

But if the home itself is not a great investment, the smart move is to own the least expensive home that serves your needs or to rent. Either way, the low-cost approach to housing can leave spare cash to invest in something more lucrative.

That's not to ignore some other benefits of owning, such as the tax deduction on mortgage interest paid. But many people overestimate the value of that deduction, which pays off most for people who itemize their deductions, face high income tax rates and pay high interest rates on their mortgage.

For most homeowners, profits on sale of a primary home are tax exempt. But a long-term investor in stocks and bonds can also minimize taxes by, for example, using Roth accounts.

So, yes, homeownership can pay off over the long term if it's cheaper than renting. But if you were to put all of your investable money into your home, you probably would not do as well as you would by keeping the housing cost down and investing the savings in another way.  Long-term homeownership is beneficial only if it minimizes housing costs, not because the home is a great investment.

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