Viewing buying a Home as an Investment?
I was recently asked by some Buyer clients of mine, for my opinion on “investing” in a house versus continuing to rent and investing in other alternatives, primarily stocks and fixed income products. I thought I would share my views on the subject with you.
This is not as simple a question as it first appears. Several research studies have been published tracking historical stock market returns versus housing index returns and I do not intend to review those results here, but rather focus on the more intangible components of the decision. As with all such studies and comparisons, the data is useful as a benchmark but your experience or actual investment results may differ widely. It is largely dependent upon what and when you buy. Market price fluctuations and the timing of your entry and exit in any asset class are huge factors in determining if any particular investment strategy was prudent for you. This leads to my main point on looking at housing as an “investment”.
For the vast majority of us a house is more than a financial investment, it`s our home and reflects our choice in how and where we want to live our lives. It provides us with numerable additional benefits of ownership beyond that available from ``financial paper`` investments. When analyzing housing as an investment class you can look at financial performance over time (price appreciation), degree of financial leverage available, transaction costs involved, the degree of liquidity (ability to buy and sell quickly), the effort required, associated tax treatment advantages, degree of volatility, transparency factors and portfolio diversification issues among other determinants and compare these results to those for stocks and bonds. However, I believe it is a mistake to view the purchase of your home as solely one of a number of alternative choices of financial investment, particularly if you are measuring it only over a short term investment horizon.
From my perspective, while houses are currently not cheap by any means, owning (especially over the long run) is better than renting, particularly when you can take advantage of historically low mortgage rates, investing in a home will yield superior financial results over time and you get to enjoy the not insignificant, ``non-financial`` benefits of ownership during your holding period. There will be ups and downs in all markets and many believe current housing market prices are inflated and out of line with incomes with affordability driven by artificially low interest rates and due for a price correction. The question is, is that relevant for you as a potential Buyer if you are looking at your home purchase as more than just a short term investment? The answer as to whether “investing” in a home is right for you and if now is the right time lies in your own particular set of circumstances, both financial and personal.
My advice to current renters and potential Buyers is work with a good Realtor, do your homework on financial affordability, research location well and compare asset quality diligently and when you look back at your decision to buy your home in 5-10 years time you will most likely be very happy with the decision you made.
Michael