After the real estate collapse of 2008-2010, it would be easy to conclude that owning a home is a risk not worth taking. That may be the wrong lesson to take away from the Great Recession.A home is not a great investment. It won’t make you rich.
After the real estate collapse of 2008-2010, it would be easy to conclude that owning a home is a risk not worth taking. That may be the wrong lesson to take away from the Great Recession.
A home is not a great investment. It won’t make you rich. If you hate yard work as much as I do, you’ll curse your home on the weekend. But, over the long haul, owning a home provides some key advantages over renting that are not entirely financial in nature.
Some homeowners may move around frequently, but statistics show that approximately 33 percent of renters move every year compared with about 9 percent of homeowners. So, renters move almost four times as often as homeowners.
Staying in one place helps to create stability in your family. It encourages you to put down roots, to build relationships in your community with the schools, the soccer teams, churches and even the merchants in your neighborhood. Those relationships may prove to be invaluable in a crisis—a sort of insurance policy against the unforeseen and uninsurable risks.
2. Monthly costs
Over time, rents tend to rise, keeping step approximately with inflation. Your rent is likely to eat away 25 percent of your income for as long as you rent. If you buy a home, your property value will likely rise approximately with inflation — not a great return, but better than nothing. At the same time, your mortgage payment will remain constant.
If you compare two hypothetical families, the Rentsalots who rent and the Ownsahomes who bought a home, after a decade you’d see a fairly striking difference in their financial situation. Assume that the Rentsalots started out paying $1,000 per month in rent. After ten years, their rent would likely rise to about $1,345 per month (assuming a 3 percent inflation rate).
At the same time, the Ownsahomes bought a home with a $1,000 principal and interest mortgage payment, assuming a 4 percent interest rate. With a 5 percent down payment, the Ownsahomes would have paid about $220,000 for a home with a mortgage of just under $210,000. After a decade, the Ownsahomes’ home would be worth about $296,000 and their mortgage balance would be down to $165,000 or so, meaning that their initial equity of just over $10,000 would have expanded to $131,000.
The Ownsahomes aren’t rich, but they do have a meaningful amount of equity in their home now. The Rentsalots not only don’t have that equity, but are now paying more each month than the Ownsahomes to rent their home.
Of course, the Ownsahomes had to come up with a down payment. That couldn’t have been easy. If they had bought their home in 2007, they might well find that even after a decade they won’t have seen much if any appreciation because of the big fall in values that followed 2007. If something, say a lost job, had forced the Ownsahomes to move during the Great Recession they might well have regretted the purchase as they’d likely have lost their equity — and perhaps much more.
Home ownership should not be seen as a way to get rich. That argument would encourage you to do unwise things, like buying a bigger home than you need or can afford. Still, buying a home that you can afford can bring peace and stability over time. Don’t ask your home to make you rich. Ask your home for a safe place to raise a family: you probably won't be disappointed.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.