Wednesday, March 4, 2015

Considering Buying A House? ... Don't Do It Because You Believe It Will Be a Good Investment ... It's Not

Affordability should be a big factor when contemplating buying a house --- not whether it's a good 'investment' or not.

Most of us were taught and believed that owning a home is a no lose proposition. It wasn't true then, and it is not true now.

Adding fuel to the fire, government policies over the years have encouraged reckless home buying through such tax favored items as the (1) deductibility of property taxes, (2) interest deductibility on mortgage debt (including deductibility of interest on home equity loans), and (3) the availability of 30 year fixed low interest rate loans.

These home buying inducements are all products of the government's tax rules and lending regulations. They entice us to do things we shouldn't do, but we don't have to take the bait.

It's like student loans, credit cards, lengthy auto loans and other financial gimmicks which result in lower monthly payments but make us weaker financially and unable to invest properly for the future. Simply put, we can't save and invest that money which we have to repay to lenders. We can't spend the same dollar twice, in other words.

Hardest-hit states won't revisit house-price peaks this decade tells the housing story in a straightforward manner:

"The hardest-hit states won’t get back to their housing-boom-era peak prices this decade....

For this analysis, (we) looked at the year-over-year growth rates both nationally and at state levels for the states where prices skidded at least 20% from their peaks.

The news is actually better for Florida and Nevada, the hardest-hit states, than some of the states in the Northeast. Since Connecticut prices were actually lower on the year, by 1.3%, that means that, at the current rate, the Nutmeg State will never get back to its peak in home prices. Similarly, at the current, paltry 1.3% rate of appreciation, it will take 28 years for Rhode Island to recapture the bubble peak.

By contrast, Florida and Nevada may reach their previous peaks in prices in the early part of the 2020s.
StatePeak to current price Years to peak at state growth rateYears to peak at national growth rate
New Jersey-22%95
Rhode Island-29.9%287

Nationally, the picture is better. With home prices down 12.7% from their peak in April 2006, the U.S. as a whole should get back to that prior peak in three years at current sales-growth rates.

A handful of states, including New York and Texas, have already surpassed pre-bubble peaks, and a few others, such as Alaska and Kentucky, are on the verge of doing so.

Prices grew 1.1% nationally in January, taking the year-on-year change to 5.7%. CoreLogic forecasts that prices will rise 5.3% in the next year."

Summing Up

There are lots of good reasons to buy a home that we can afford, just as there are lots of good reasons to get a college degree.

That said, buying a home and believing it will be a good investment is a bad idea, just as is borrowing lots of money to attend college.

In fact, both are terrible ideas.

That's my take.

Thanks. Bob.

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