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Home Ownership Was Never a Road to Riches
My wife and I have sold all of our four previous homes for more than we paid for themsometimes a lot more.
Weve been pretty lucky. Weve never overpaid much for a house, weve always bought in good school districts and decent neighborhoods, weve lived in neighborhoods where prices soared during the real-estate bubble, and weve been hurt but not decimated by the bursting of that bubble.
When I constructed a very basic cash-flow model for our home-buying historyselling price minus purchase price, renovations and repairsit showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year. Thats when we sold our last home and bought our current one.
Then things got ugly. If we were forced to sell our current home, which I estimate has lost 5% or so of its value in our 10 months of ownershipdespite the more than $20,000 weve made in improvementsour cumulative return over the years sinks to approximately 2% annually. And if prices keep falling in our northern New Jersey neighborhood, as is likely for a while, that return will shrink even further.
So do I regret owning a home? Heck, no. Its not a get-rich scheme, and Americans never should have viewed it as one. Owning a home has given my family a series of anchors to cling to as weve moved around the country for my job. Its allowed us to live in pleasant neighborhoods where it would have been tough to find a rental house. And paying down a mortgage is a form of forced savings, which should help us in retirement.
Columbia Business Schools Christopher Mayer, who has studied housing markets, says our experience with home-price gains is pretty typical. Home appreciation nationally has run about 1% above inflation over time.
The big price run-ups from the late 1990s through 2006 or 2007 were an aberration. The biggest value you derive from home ownership isnt appreciation. Its being able to live in it, Prof. Mayer says, and avoiding the rent you would otherwise have to pay.
Once you add in imputed rent and subtract property taxes, Prof. Mayer estimates, my 2% annual home-ownership return looks more like 6%.
Thats why you should buy as much home as you needbut no more. A bigger home than you need isnt an investmentits an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesnt make it a smart move financially.
Another reason home ownership isnt the road to riches: Most housesespecially the old ones my wife and I favorare money pits.
Consider the house we owned in Verona, N.J., from 2001 to 2004. We bought it for $335,000 and sold it for $455,000 near the height of the real-estate boom. Thats nearly an 11% annualized return. The only problem was that we sunk $45,000 into renovating the bathrooms, spiffing up the kitchen, refinishing the floors and the like. The result: Our actual return was less than 7%.
Contrast that with our current house. Counting the money weve sunk into it and its decline in value, I estimate close to a 10% loss on our investment since we bought it last year. Prof. Mayer predicts house prices in the New York metropolitan area will fall an additional 10% over the next couple of years.
Thats the brutal financial reality of home ownership in todays market. But the consolation is this: I really like our house, our neighbors and the quaint suburban town where were now putting down roots. In other words, Im happy being a tenant in this building I happen to own.
Article from: http://online.wsj.com