Gimmie shelter
Lots of people think renting is for suckers. Part of this is because of landlords, widely reputed to be deadbeats who collect rent for doing nothing. But rent is just another way of consuming the necessary good called shelter; homeownership is simply an alternative that masks the consumption process as depreciation and mortgage payments. For some reason people don’t mind paying bankers rent in the form of interest payments on the money they borrow to buy housing, perhaps because of the tax breaks on this expense. But mostly it is because people fetishize ownership and misconstrue homes as investment instead of consumption. This list of five home ownership myths (via Ezra Klein) makes this point very succinctly.
The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.
Although home prices can go up (and down), the rate of appreciation on housing does not surpass inflation levels over the long-term. Between 1890 and 2004, the real return on housing was a pathetic 0.4 percent per year over the last 100 years, according to Robert Shiller, a housing expert and Yale economist.
Real estate investments aren’t that much better over the short-term. The gain in new home prices over the last 20 years has been a mere fraction of the Dow’s gain. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.
The homebuying frenzy sustained a lot of people in the parasitical industries that surround the fiendishly complicated process of real estate sales, but that doesn’t mean it was necessarily any good for the people making the purchases. Those now in negative equity are probably finding that out, and I wonder how much solace they have in the fact that they are making mortgage payments and not “throwing their money away” on rent.
I really wouldn’t give any weight to the “renting/buying is for suckers” viewpoints. There are plenty of people who have these convoluted ideas of which choice is better, usually based on their own fears and misconceptions. As you mentioned, plenty of recent buyers need to justify that they overpaid for their property and others are disappointed they didn’t jump into the market when mortages were cheap and easy.
Even being a homeowner, I recognize that renting is great, allowing mobility, freedom of major maintenance costs, less expensive, access to live in an desirable area without mounds of money. I do not preach a party line to anyone, I think it is an individual choice to rent or buy.
I don’t necessarily agree that real estate is bad investment, of course it must follow the laws, buy low/sell high and location,location,location. In the last 10 years, I missed out on a few opportunities to purchase properties that would have doubled in price in the next 2-7 years. Personally, I know I could not have made that return in another way but I am not a good investor otherwise.
I think the tangible aspect of real estate is attractive to investors, stocks are still pretty abstract and are subject to totally unknown circumstances. Apart from buying a house in Centralia at the height of market frenzy, real estate is almost always a slow but steady investment. The recent madness has skewed people’s perceptions into thinking that buying real estate is like winning the lottery.
“Renting from the bank” is a weak arguement, after 30 years of rent payments, you have another monthly rent payment due as opposed to being free and clear.
Anyone looking to make money by purchasing real estate at the present time will be severly disappointed.
I call bullshit on that .4% return. Maybe that factors in nationwide where acres West Texas or Missouri property have not appreciated at all. But in the suburban areas on the East Cost I am familiar with it is a totally different story.
Comment by Timmy K from Perkaset — March 22, 2008 @ 9:32 am