Homeownership Not Always the Path to Prosperity It's Said to Be
NEW YORK (TheStreet) -- The spring home-buying season is limping along, suffering from a sluggish economic recovery, a shortage of inventory and tight lending standards. To pour salt in the wounds, in many markets buying is now a better financial option than renting.
But if you'd like to buy and can't, don't feel too bad -- homeownership isn't always the path to prosperity that many make it out to be. We've often noted that, on average, home values don't rise as fast as stock prices, making stocks and stock funds a more profitable choice for long-term investors. Last year homes gained an impressive 12%, while the Standard & Poor's 500 returned a stunning 32%.
But poor investment returns are just one of several reasons to avoid sinking every cent into a home.
New York Times columnist Josh Barro noted Monday that the homeowner, instead of seeing the home as an investment, should view it as "consumption good" like a lifetime supply of chicken breasts. But people resist thinking of homes this way."[Because] housing consumers tend to take long-range equity interests in housing, they come to view housing as an investment, which distorts the housing market in the directions of restricted supply, inflated prices and speculation," he said. tax free, a rigorous accounting of all these expenses could well show there is no real profit even if the sales price far exceeds the purchase price. Also, as an investment, the home is "illiquid," meaning it can be difficult and time consuming to sell. Other investments can be converted to cash with the click of a mouse. "I will grant that there are some advantages of homeownership," Barro writes. "Owning offers people a sense of security, as well as the freedom to customize their residences as they see fit. Those are perfectly good reasons to buy a home as a consumption good; it is not a justification for homes (or chicken breasts) as investments." Over the long haul, owning may be more economical than renting. But "more economical" is not the same as "profitable" -- owning is merely less expensive. With anything that's an expense rather than an investment, the goal should be to keep the cost as small as possible. So when it does come time to buy, get the least expensive home that suits your needs, not the most expensive you can afford. Then invest the savings in something more promising.
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