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Editor's Note: This is a guest post by Go Banking Rates
By
definition, an investment is "the act of laying out money or capital in
an enterprise or asset with the expectation of profit." So by
definition, is a home really an investment? With mortgage rates at a
historical low and depressed home prices, it really depends on who you
ask.
The self-made, multi-millionaire real estate investor who bought in when homes were cheap would answer with an emphatic yes. But times are different now, and many of those same home flippers and amateur investors are declaring bankruptcy while banks are seizing their assets.
In the wake of one of the worst economic catastrophes ever (and caused by overzealous home purchases), people are finally starting to realize that the era of easy money is gone when it comes to housing. While most people still believe a home is a great investment, there are several good reasons why you should reconsider thinking like most people.
Take a look at the major decline that the housing market has suffered from lately. Things are not looking good for millions of homeowners who are now late on their mortgage payments or are already in foreclosure. Try telling them that housing is a good investment.
This recent development only shows how volatile housing can be. Unlike stocks or smaller investments, you cannot sell a home quickly if you needed to.
It sounds great to own a second home or investment property. You get the title of landlord, get to brag to people that you own property, and you're finally in charge.
Guess again.
Many people have no clue how difficult managing a property can be, especially in states that often favor tenants over landlords. You could have periods of vacancy, vandalism from horrible tenants and a host of other regulation issues on your hands.
On top of that, maintenance fees and property taxes can cripple you. Have you checked on the price of a new roof or a set of new pipes? It's definitely not the dream many expect.
By the time investment property owners are ready to call it quits, they've either lost money or broke even after years of stress.
Using data from the Case Shiller Index of 10 major cities, The Wall Street Journal ran an article showing that home prices produced a real return of just 1.15 percent a year over inflation.
If you bought a home in one of the 10 major cities in 1994, almost the lowest historical trough for home prices, you would still only come out 2.5 percent ahead of inflation. Compared to stocks and inflation proof government bonds, that's a pretty low return. Factor in other things like maintenance and property taxes and you could have actually lost money.
So the next time you're at a party and someone brings up the abundance of opportunity being presented by the weak housing market, you'll be able to provide them with some facts.
You can definitely come out ahead in housing if you're buying for the long term (about 10 years), but then, isn't that more of a home than an investment?
This guest post was written by Go Banking Rates, bringing you the best interest rates on financial services nationwide, as well as informative content and helpful tools. Subscribe to RSS
About Guest Writer
This post was written by a guest writer. If you'd like to add a guest post in Money Hacker, please check out Write for Us page for details about how YOU can share your knowledge with our community.
By
definition, an investment is "the act of laying out money or capital in
an enterprise or asset with the expectation of profit." So by
definition, is a home really an investment? With mortgage rates at a
historical low and depressed home prices, it really depends on who you
ask.The self-made, multi-millionaire real estate investor who bought in when homes were cheap would answer with an emphatic yes. But times are different now, and many of those same home flippers and amateur investors are declaring bankruptcy while banks are seizing their assets.
In the wake of one of the worst economic catastrophes ever (and caused by overzealous home purchases), people are finally starting to realize that the era of easy money is gone when it comes to housing. While most people still believe a home is a great investment, there are several good reasons why you should reconsider thinking like most people.
1. Homes Don't Always Appreciate.
Take a look at the major decline that the housing market has suffered from lately. Things are not looking good for millions of homeowners who are now late on their mortgage payments or are already in foreclosure. Try telling them that housing is a good investment.
This recent development only shows how volatile housing can be. Unlike stocks or smaller investments, you cannot sell a home quickly if you needed to.
2. Investment Properties Often Lose Money.
It sounds great to own a second home or investment property. You get the title of landlord, get to brag to people that you own property, and you're finally in charge.
Guess again.
Many people have no clue how difficult managing a property can be, especially in states that often favor tenants over landlords. You could have periods of vacancy, vandalism from horrible tenants and a host of other regulation issues on your hands.
On top of that, maintenance fees and property taxes can cripple you. Have you checked on the price of a new roof or a set of new pipes? It's definitely not the dream many expect.
By the time investment property owners are ready to call it quits, they've either lost money or broke even after years of stress.
3. Returns are Minimal.
Using data from the Case Shiller Index of 10 major cities, The Wall Street Journal ran an article showing that home prices produced a real return of just 1.15 percent a year over inflation.
If you bought a home in one of the 10 major cities in 1994, almost the lowest historical trough for home prices, you would still only come out 2.5 percent ahead of inflation. Compared to stocks and inflation proof government bonds, that's a pretty low return. Factor in other things like maintenance and property taxes and you could have actually lost money.
So the next time you're at a party and someone brings up the abundance of opportunity being presented by the weak housing market, you'll be able to provide them with some facts.
You can definitely come out ahead in housing if you're buying for the long term (about 10 years), but then, isn't that more of a home than an investment?
This guest post was written by Go Banking Rates, bringing you the best interest rates on financial services nationwide, as well as informative content and helpful tools. Subscribe to RSS
About Guest WriterThis post was written by a guest writer. If you'd like to add a guest post in Money Hacker, please check out Write for Us page for details about how YOU can share your knowledge with our community.
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I think you statements are valid only for the short term of a few years and not for a period of 5 yrs are later.
Sherin Dev (Money Hacker blogger)
I am the writer of the article.
You're making generalized assumptions about population increases and resources that just aren't correct. First, although the population is increasing, most of the land in the U.S. is sparsely populated outside of concentrated metropolitan areas. Secondly, home values will not increase because they were massively inflated from 2000-2006. To get an accurate estimate, you should be looking at 1995 levels for homes and increasing it by 5% each year until you get to today.
On top of this, there are other economic forces at work that will prevent housing from recovering. The U.S. has lost millions upon millions of jobs to overseas competitors that will never come back, our manufacturing base has eroded, no one is buying our debt (read: China) and the only companies that make money are technology-based. Our financial services sector has lost its credibility and jobs have also been shed. I'm well aware that Goldman Sachs and their ilk continue to dole out record bonuses, but it's a shill game and no one should take that as a sign that things are going in the right direction.
Lastly, do a search for shadow inventory and foreclosure rates across the country. Aside from the homebuyer tax credit giving a little boost to housing in April, things are going straight down. Finally, read about Japan's lost decade where the government intervened to keep housing prices high. Their stock market still hasn't recovered due to the fraud and faulty government actions. Sound familiar?
Both of these measures show that homes were inflated dramatically. A house as an investment is also very simple to find the data for. The increase in value comes from an increase in the cost of the house (the difference between your buy and sell price). Expenses come from the mortgage, property taxes, insurance, maintenance and repairs, closing costs, etc.
The only way you can really make money from "investing" in housing is by avoiding the mortgage costs and getting closing costs on the cheap. This means you need a huge chunk of change to start with and good connections in real estate (such as being an agent yourself). None of this is attainable by the standard family.