We read an interesting article in the Wall Street Journal on Monday titled A Home Is a Lousy Investment. It was written by Mr. Bridges, a professor of clinical finance and business economics at the University of Southern California™s Marshall School of Business. The essence of the piece is that owning a home is not a good financial investment for younger generations. The subtitle: œToday™s young people would be foolish to imitate their parents and view ownership as the cornerstone of personal finance.Today, we would like to counter some of the points made by Professor Bridges. The professor looks back on California home values over the last thirty years and begins with the assumption:œIf a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years¦ There are several challenges with these givens. Let™s break them down.
œa disciplined investor
There is no doubt that discipline in savings is important. However, studies show that homeowners attain greater wealth because of ˜forced™ savings.The Joint Center for Housing Studies at Harvard University released a study, America™s Rental Housing: Meeting Challenges, Building on Opportunities. They explain:œIn addition, renters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600”about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.
œinvest the 20% down payment
The professor™s math supposes a 20% down payment. What about the people who put 5% down or 10% down. What about those who purchased a home with an FHA mortgage putting 3% down; or our veterans who used a VA mortgage to purchase a home with no down payment? (For those who think low down payments have caused the current foreclosure challenge, the difference in default rate between a 5% down deal and a 20% down deal is less than 1%).
œnormal homeownership expenses (above the cost of renting)
It™s great that Professor Bridges looked at data over the last 30 years. History is important. Foresight is much more valuable than hindsight however. In most parts of the country, homeownership is currently less expensive than renting. There is not MORE money to invest if you rent. There is LESS.In their report mentioned above, Harvard University found:œRental markets are now tightening, with vacancy rates falling and rents climbing. With little new supply of multifamily units in the pipeline, rents could rise sharply as demand increases.Trulia, in its second quarter 2011 Rent vs. Buy Index, stated that buying a home has become more affordable than renting in nearly four out of five (78%) major cities. Ken Shuman, Head of Communications at Trulia said: œWith home prices nearing a double dip and more foreclosures expected to flood the housing market over the next two years, the decision between renting and buying a home across most of the country has clearly moved in favor of buying.The premise of Professor Bridges article doesn™t apply to the current market. Even some in the academic world agree that now is the time to buy.Business School professors Eli Beracha of East Carolina University and Ken H. Johnson Ph.D. of Florida International University have done extensive research on which makes more sense financially: to rent or own a home. They published a sensational paper on this issue: Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise?. In their paper, they explain:œ[F]undamental drivers now appear to be in place that favor homeownership over renting in the near term future¦[This] finding might seem unwise to many given the recent crash in the real estate markets around the country. However, rent-to-price ratios now seem to be in place along with other fundamental drivers that favor ownership over renting.They conclude their research paper with this sentence:œConditions (historically low mortgage rates and relatively low rent-to-price ratios) now seem in place to favor future purchases.
If Professor Bridges™ assumptions are incorrect, how much value can the conclusions hold?
Bottom Line
The best advice given in the Wall Street Journal article was in the last paragraph:œOwner-occupied homes will always be the basis for healthy and stable neighborhoods.And, in today™s market, a home is also a fabulous investment!!