Housing as an Investment
The recent bursting of the housing bubble has made people think twice about the old notion of buying a house as an investment. Felix Samon argues that it’s almost never a good idea.
Real estate is pretty much never a good investment in a down market, no matter how granular and detailed your local knowledge is. Meanwhile, in an up market, it doesn’t matter much either. Yes, that gentrifying neighborhood is going up in value. But so’s the old-money neighborhood a mile away, and so’s everything else in a 20-mile radius.
Matt Yglesias seconds this:
I thought the tax subsidies and the fact that I liked the place made it worthwhile for me to buy a condo a bit more than a year ago. In the future, it might be worth more than what I paid. But if it is, that will almost certainly be because DC-area property in general has increased in value. So if I, say, need to move into a bigger place to have kids then an increase in property values isn’t going to help me. Sure I’ll “make money” on selling my existing place, but I’ll just need to pay more for a new place.
Right. But many people move to the suburbs, especially as they get older and have kids. Or, even if they stay in the same pricing zone, they’ve earned equity that helps finance the move to a bigger, more expensive place. Renters, meanwhile, are basically throwing money down a rathole each month.
Remember that it’s sometimes not a good idea to buy a house even if your total monthly payments are lower than what you would be paying in rent on the same place. If prices fall, rents can fall too: just ask any landlord in New York City. And while the renters next door are happily renegotiating their lease so they pay $300 a month less than they were paying last year, you’re stuck with the same fixed mortgage for the next 30 years. If only you’d held off buying, your monthlies would be lower while renting, and you could buy now, if you were so inclined, at a lower price. Price the option: if you’re renting, you always have the option to buy. If you already own, you don’t.
Look, there’s no doubt that there’s risk in buying. Sometimes, prices go down for the short term and, yes, that means you might have been able to rent comparable housing for less. On the other hand, prices frequently go up. And a mortgage locks in the initial rate.
Beyond the rise and fall of prices, the main investment advantage of purchasing a home is that the tax code allows writing off mortgage interest. For those in expensive real estate markets, that’s a huge incentive.
To be sure, there are downsides to home ownership — higher maintenance costs, constraints on mobility, transaction fees, etc. — that make it a bad decision for many people. If you’re likely to be moving in the next couple of years, it’s likely a bad idea. If your expected income is such that making rent or mortgage payments is about all you can handle — and therefore an unexpected major repair would be crippling — it’s definitely a bad idea. But for most of us, buying just makes sense over the long haul.