NEW YORK (MainStreet) — “Housing is an investment.” Every buyer, seller and lender who helped inflate the housing bubble said that at one time or other, and if you talk to any of the millions of Americans stuck today with an underwater mortgage, chances are they only ever took on that outrageously high debt burden in the first place because they’d convinced themselves of it.
The statement isn’t untrue so much as it’s misunderstood. Problem is, the English language has only one word — “investment” — to describe two completely different things. Some investments are intended to generate income, while others serve only to reduce expenses. Or, to put it another way, there’s make-money investments and save-money investments. The housing bubble happened because too many people got confused: Your primary residence is a major investment, yes, but it’s a save-money one.
Stocks and bonds are the best-known make-money investments; with luck, they generate actual income for you.
But real estate is a make-money investment only if you intend to rent property out as a landlord. You can’t do that with your primary residence, or anything else to make money either (remember that home equity lines of credit are not “income” but “debt obligations”).
If anything, your primary residence is likely to cost you money — taxes and insurance, maintenance and repairs — and the presumptive savings apply only when compared with rental costs.
Shelter is a basic necessity of life: No matter what happens, you must pay money each month in exchange for a place to live. The whole point of buying rather than renting is that in time, when the mortgage is paid off (or inflation makes your payment shrink in real dollars), you can live there for less than the cost of renting a similar place.
That’s why, when I moved out of my parents’ house into my first very-own apartment in a nearby town, the monthly rent I paid for a tiny two-room efficiency was only slightly less than their mortgage payment on a four-bedroom suburban palace. My apartment also lacked a washer and dryer, and hauling clothes to the coin-op laundromat was my least-favorite chore of adulthood. So a few years later, when I upgraded to a better apartment with washer/dryer hookups, I bought a pair of laundry machines immediately, primarily for convenience: Hang the costs (I thought), doing laundry at home is much easier than collecting quarters and hauling everything to the coin-op.
But those machines turned out to be an excellent save-money investment as well: If you compare what it costs to wash and dry a load of clothes at a laundromat versus the cost to buy and operate inexpensive home laundry appliances, the machines paid for themselves in only a couple of years. Today, my laundry costs are only a fraction of what they were in my coin-op-customer days.
You can think of lots of things in your home the same way, although most of them take more commitment than a washer and dryer:
- If you fill a room in your home with a treadmill or other exercise equipment and really, really use it, you’re going to save on the cost of going to and from a gym; monthly membership; those expensive extras you don’t use, such as a sauna or the day care room; and getting lured to buy a treat at that super-expensive smoothie bar.
- It’s hard to work at home — unless you have a separate home office. That Wi-Fi you otherwise use for Netflix and that coffee maker in your kitchen mean no obligation to pay for Internet access by the day or buy expensive mochachinos in return for squatting for hours at your local cafe.
- In fact, your entire kitchen can save you from the costs of excessive eating out or ordering in. And your garage and a few tools can save you from $25 to $75 each time you need to change your oil.
So buying that washer and dryer was a good money-saving investment, just as buying a house should be. Still, it’s a bad financial mistake to confuse either purchase for an income-generating make-money investment. America’s underwater mortgage holders have learned this to their sorrow.