Is Buying a House a Good Investment? (Not compared to buying stocks… but that doesn’t mean you shouldn’t do it) - AFCPE
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Is Buying a House a Good Investment? (Not compared to buying stocks… but that doesn’t mean you shouldn’t do it)
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Thank you to this issue’s contributors:
Timothy J. Corriero, CFP®
Alyssa Hart Blakemore, AFC®
Sabrina Johnson, AFC®
Andrew S. Leonard, CFP®
Jessica Padden, AFC®
Michelle Pimentel, AFC®
Joanna Swanson
Brenda Vaughn, AFC®
Rebecca Wiggins
Stephanie R. Yates, Ph.D., AFC®
Written By: Timothy J. Corriero, Andrew S. Leonard
A house is the largest asset that most families will ever own. It is also the most emotionally-meaningful. Over the past two decades, housing values have increased significantly, even doubling or tripling in cities like New York and San Francisco. These dynamics result in the conventional wisdom that renting is "throwing money away" while buying "builds equity." This article analyzes those assumptions while addressing the question, "is buying a house a good investment?"
There Are Good Reasons to Buy a House… but Those Reasons Are Not Financial
The arguments for homeownership are convincing enough that both of the authors have purchased a house in the past year. Our reasoning included some combination of the following:
A home provides stability. We want our children to have a “home base” that they will always remember, think of fondly, and be able to return to
A home allows us to customize. We want a space that we can use, remodel, and decorate precisely as we choose
A home provides social benefits. There are proven intangible benefits to owning such an emotionally-meaningful asset. People who own their homes are more likely to be satisfied with their neighborhoods, more likely to get involved in the community, and more likely to participate in political or voluntary activities
Our significant others want to be homeowners. For some couples, one person feels strongly about one or more of the above reasons. Even if the other does not, this alone can be a powerful motivator
Renting isn’t an option. The type of home we want, in the area we want to live, simply is not available as a long-term rental.
These reasons are valid and importantly, they are entirely non-financial.
If the Decision Were Purely Financial, You Are Probably Better Off Renting
A properly-constructed ‘Rent versus Buy’ model will typically reveal that renting is the financially-optimal decision. The logic is driven by two factors:
First, the costs of homeownership are significant. These costs, which renters largely avoid, are almost always underestimated. They include:
Transaction costs. The sale of a house generally involves a commission to realtors that ranges between 2% and 6% of the purchase price. In most regions, the buyer and seller also pay various transfer fees and taxes. These transaction costs create an immediate financial loss that takes time to recoup, making it unwise to purchase a home unless you intend to own it for at least six or seven years.
Improvements. We mentioned the ability to customize your home as a non-financial argument for buying. The financial downside is that you will likely take advantage of this option, and it is often costly to do so. Homeowners often rationalize these costs by assuming they will be recouped when the house is sold, but because buyers and sellers have different tastes, rarely does a seller fully recover all improvement costs.
Property taxes and maintenance. While these significant expenses are often the first ones mentioned when discussing the costs of homeownership, we don’t believe that they are a major factor in the ‘Rent versus Buy’ decision, as they are largely implicit or are “baked into” rental prices. That said, because people tend to purchase larger homes than the ones they would have rented, they typically pay more in taxes and...