Maybe, maybe not. Several months ago, I was sitting with a 60ish guy and he brought the point up. Now, neither of us were looking to buy a house and there were no 20/30 somethings present for him to share his “words of wisdom” with. He works for a big company; so, he might think that he is an expert on all things financial. (Yes, my Family probably thinks the same of me.) This man always recommends things without thinking them through. Perhaps, like many of the older generation, he is suggesting for the future, based on his recollection of the past.
I recall attending an investment seminar where one of the speakers was from Christie’s, the auction house. She said that if you are investing in Art, make sure that you like it. That way, if it doesn’t work-out as an investment, you will enjoy having it in your home or office. The same might be said for buying a house as an investment, as well.
We bought our house, perhaps 25 years ago. Since then, it has more than doubled in value. Good investment? Again, maybe, maybe not! But, like the Christie’s Lady said,we bought our house because that’s where we wanted to live–and raise our Family. And, we’re still glad that we did.
People in the Financial Business use something called the “Rule of 72s”. Basically, if you take an Invested Amount, and divide it by an assumed Annual Rate of Return, the Resultant will be the number of years for the investment to double. For instance, take $100,000, and at an annual rate of three percent, it should double in 23 years. Not that big a deal, huh?
The old idea of buying a house, as an investment for the future–namely Retirement–started in a different era. Besides a paycheck, employees then generally received a small pension (at retirement) and health care benefits. Jobs were stable, successive generations worked for the same companies, or lived in the same towns. And, many jobs were local–and stable
Today, however, most paychecks are before health expenses are accounted for. Pensions are becoming more and more a part of a bygone era and, even at the very largest corporations, they are being whittled away. Perhaps, that’s part of the “New Normal”.
And, can anyone really depend on job security these days? Corporations are merging in order to consolidate overhead expense. That means that, not only are jobs being outsourced overseas; but, consolidation moves people from one regional office to another. And, that can impact the housing market, as well.
Now, let’s focus on the Real Estate Market. Some 25 or 30 years ago, Banks required mortgage applicants to provide financial details of the Family Income and Net Worth. The applicant(s) had to show that they would have a 20% (or more) equity stake in their home, and could pay the monthly debt service (principal and interest), both on the Mortgage and on other recurring debt. And, back-up assets were helpful.
More recently, Banks had not considered a borrowers ability to repay the mortgage and, perhaps, failed to explain that the monthly mortgage payments would probably rise and, in some cases, interest was even being added to the principal. That often meant that the interest rate went up at a time that the mortgage principal did, as well. Why was that?
Banks were no longer holding (continuing to own) the loans. Rather, they were sold-off to be used to collateralize mortgage-backed securities (MBS). These bonds were, in turn, sold to investors, both in the U.S. and overseas. In spite of all the uncertainty involved, some of the credit rating agencies assigned these questionable MBS’s their highest rating of AAA. When the monthly mortgage payments jumped–due to higher rates and mortgage principal–the foreclosures began to skyrocket. So, there goes the Home as a long-term Investment.
In those prior years, when people lived in towns for generations, they would invest in a home early in their careers and, by the time they were ready to retire, they could downsize–into a smaller home or condo–and invest the excess toward retirement. Well, now that’s not the New Normal.
Remember basic Economics–the Law of Supply and Demand? With all of the Baby Boomers approaching retirement mode, there will be a glut of three-to-five bedroom houses on the market. And, that may continue for another 18 years. So, the price of “Family-sized” homes will drop as the Supply increases, and the price of smaller dwellings will rise as the Demand picks-up. Thus, the Supply-Demand factor will minimize, or perhaps even eliminate, any excess value to add to the retirement nest egg.
Now, think of the 20/30 somethings who might have been in the market, in the past, to buy those larger houses–and, perhaps, start families. Given the recent economic conditions, many of the younger generation are burdened with student loans, low-paying jobs and the lack of employment stability. Perhaps they’re even living with their Parents. Marriage and starting Families may have to wait. So far, the real estate market indicates that more Home Buyers–both Young and Old–are opting for smaller houses, or event renting.
So, my friend, who was suggesting to no one in particular, that a house is a good investment was, in my opinion, totally wrong. Buying a house should be, as the Lady from Christie’s said, a personal thing. Buy because you want to live in that house and at that location. In today’s environment, however, just do not try to project too much into how long you will remain there–or its future market value. Put money into your Company Retirement Plan, if there is one, and also invest through an IRA or personal account.