Homes Are Still Good Investments
May 28, 2009 7:43 AM
In a May 27 Wall Street Journal article, writer Brett Arends concluded that very safe long-term inflation protected government bonds are better investments than buying a home. The bonds will likely provide a higher annual return than historical long term home appreciation rates, which are just above 4% (that historical average, by the way, has been changed very little by the combination of unprecedented run up in home prices during the first half of this decade, followed by the unprecedented retreat of those prices in the second half). The author did not consider other important factors that make homes a much better investment in reaching his conclusion, however.
The ability to heavily leverage a home purchase greatly increases the return on the initial investment (the down payment). If you made a 10% down payment, you should multiply the annual appreciation rate by ten to get your real rate of return. Mortgage interest and PMI payments are tax deductible and rents are not, so you have to compare the after-tax cost of your mortgage payment to the actual cost of rent. Because of the high home sales tax exemption, there are no taxes on the profit from the eventual sale of most homes. You pay ordinary income tax at your highest marginal rate on your bond interest, and ordinary income tax or capital gains taxes on the sale of any bonds before their maturity. Rents on equivalent homes are usually less initially than monthly mortgage payments on the first home you buy, but rents go up while mortgage balances decline. Thirty years later the mortgage will be paid off, and the rent on an equivalent home by that time will by then almost certainly be much higher than your old monthly mortgage payment. After that the rent will still keep going up, but you'll never have to make another mortgage payment.
Historically home equity has been the largest form of savings for most homeowners. Considering these additional factors, and subjective considerations such as the satisfaction and sense of community derived from home ownership, buying a home remains one of the best possible investments a consumer can make. And besides, you can't live in a long-term inflation protected government bond anyway.
Historically home equity has been the largest form of savings for most homeowners. Considering these additional factors, and subjective considerations such as the satisfaction and sense of community derived from home ownership, buying a home remains one of the best possible investments a consumer can make. And besides, you can't live in a long-term inflation protected government bond anyway.
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