A home could cost you…..
Over the years conventional wisdom told us homes build wealth. We have also been told its better to own .vs rent. But according to financial advisers and the New York Times this may not always be the case currently.
In a recent article in the New York Times, Dean Baker, co-director of the Center for Economic and Policy Research, estimated that it will take 20 years to recoup $6 trillion in housing wealth lost since 2005. We all know that Home Valuation Code of Conduct (HVCC )has caused issues with getting values across the country currently. But on the other hand look what happened to the value of homes that were dictated by lenders, builders, Realtor and appraisers. We squeezed the value out of homes until it exploded…… I admit I was guilty of this… We were stretching values to “the brink of destruction’ to get a deal done. Now we are feeling the after affects of buyers whom paid above market prices for their homes around the country.
Here is an analogy from a financial adviser with LPL Financial. He claims homes are a bad investment, especially in this market. I found this comment interesting and wanted him to explain this…. Here is what he said… If you take a $275,000 dollar home with a 5% interest rate and 5% down….
Scenario for Primary Residence Buyers:
| Home Value of $275,000 | Cost & Return |
| Average Increase of Valued 3% | $8,250 |
| Inflation of 3% | $8,250 |
| Taxes – 2.5% | $6,250 |
| Utilities | $3,000 |
| Repairs | $3,000 |
| Total Return | -$12,250 |
A $12,250 per year loss is a not the investment I am looking for. Let’s not kid our selves, owning a home is for personal gratification. I do however believe it’s more beneficial to own .vs rent, but if you are looking for big investment returns, you better look elsewhere.
The scenario above did not include the cost of interest paid on the principal balance. Even though interest and taxes are deductible, not everyone’s deductions are the same. Your deductions depend on your tax bracket. So this was not included in the scenario… but is however another cost.
A home being a good investment is debatable. This really depends on the scenario, but I believe in most cases a home is a bad investment. One might consider a home just an “American dream” and a luxury.
Author: Mike Clover
CreditScoreQuick.com
It’s hard for most Americans to swallow the current “health” status of their home’s value. Things have changed and just aren’t what they used to be when it comes to home ownership. More due diligence is needed BEFORE you purchase to make sure you truly know what you’re getting yourself in to. Not enough people run calculations like this to realize what they may be getting in to.