Tuesday, December 2, 2014

Homeownership as a Means to Wealth Accumulation Isn't a Good Idea ... The Best Financial Plan is to Buy What You Can Easily Afford or Rent Instead ... Then Save and Invest in Stocks for the Long Haul

Owning one's home has long been the American dream. That said, it also has often become the American nightmare.

But is it really a good way to save and invest for the long haul, as is widely believed? No, it's not. At least not if we look at buying a home as a wealth accumulation vehicle when contrasted to picking a lower priced home and then investing the 'remainder' in stocks. There is simply no comparison between the ~7 annual inflation adjusted price and dividend appreciation associated with long term stock ownership compared to the ~0% (after inflation and realtor fees) associated with home ownership.

Thus, the homes we buy should be affordable in relation to comparable rental homes. As residences they are to be lived in and not viewed as good financial investments.

Homeownership and Wealth Creation has the story:

"Since the housing bust, renting has been in and owning a home has been out, especially among young adults who in earlier decades would have been first-time home buyers. As the rate of homeownership has declined, from a peak of nearly 70 percent in 2004 to a 20-year low of 64.3 percent recently, the number of owner-occupied homes has barely budged, while the number occupied by renters has increased by nearly 25 percent. . . .
Homeownership long has been central to Americans’ ability to amass wealth; even with the substantial decline in wealth after the housing bust, the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little if any wealth.
A recent study by researchers at the Joint Center for Housing Studies at Harvard University analyzed the reasons for these differing outcomes. Paramount among them is that homeownership requires potential buyers to save for a down payment, and forces them to continue to save by paying down a portion of the mortgage principal each month.        

Gap in Net Worth

Figures in 2013 dollars.

Median net worth
of homeowners
Median value of primary
residence of homeowners
Median net worth for renters
Renting, in contrast, offers the potential for comparable wealth building only if renters invest an amount equal to a down payment plus any savings from renting. As a practical matter, most renters do not do that. Even in instances where renters have excess cash, saving a substantial amount is difficult without a near-term goal, like a down payment. It is also difficult to systematically invest each month in stocks, bonds or other assets without being compelled to do so."
Summing Up
Contrary to popular belief and government policy, borrowing as much as the bank will loan to buy a house is not the best way for individuals to achieve financial security.
In fact, the only strong case for homeownership is that individuals won't otherwise save and invest in their future financial health and well being. In other words, the argument is that we need to buy a house we can't really afford because we won't save and invest for the long haul unless forced to do so. That's sounds like an education and self discipline problem to me.
Since homeownership is in effect a form of forced savings, the conventional argument is that borrowing as much money as possible to 'own' a home is the best way to 'invest' in the future. But that's simply untrue.

Saving and investing in stocks for the long haul is clearly a better alternative to 'investing' in residential real estate as a way to achieve financial security.

Houses are great to live in and ownership has its own rewards. But as an alternative to owning stocks for the long haul, it's not a winning choice.

That's my take.
Thanks. Bob.

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