Buying Well Is The Best Revenge
I have been advocating for years in favor of viewing a home purchase as primarily a quality of life decision. In that vein, a recent article in Crain’s by Erik Engquist called “Your Home Is Not An Investment” made a big impression on me. But what made the big impression were two points with which I disagreed: first, the notion that we real estate agents are trying to fool our buyers into false confidence by assuring them their homes will gain in value. In fact every responsible agent I know assures buyers that they should plan on a 5-year ownership period to make certain that cost and return balance out. Second, and more importantly, his premise that a home is, as investments go, a bad one only makes sense if your alternate plan is living in a cardboard box under the East River. Here’s MY way of looking at these issues:
1) You probably have to live somewhere. Which means that if you don’t buy, you rent. If you rent, you still have many of the costs associated with any residence: insurance on the contents of your home, basic maintenance and electricity, moving expenses, etc. Plus, at least in the New York area, you are paying a big number of after tax dollars for the rental. I agree with Mr. Engquist that borrowing a lot of money does not guarantee that you will make a lot of money, but it does at least provide you with a tax deduction (unmentioned in his op-ed piece) which, these days, is worth its weight in gold. If you stack up the cost of buying, including interest payments and the redeployment of some of your cash, against the cost of renting, it’s still better to buy most of the time provided you have a long enough timeline.
2) In the current environment, or for that matter any time in the last decade, who is paying 5.5% on a mortgage, as his example posits? Even after a few increases, the average homebuyer is paying 4.25% today. Artificially low mortgage rates have driven the housing market since the end of the recession. Even with the gradual escalation which now seems inevitable, it will be some time before rates reach 5.5%.
3) Up until mid-2008, buyers reliably made tidy profits on their New York homes even after considering the costs of living in them. That became true again for anyone who bought between the latter half of 2008 and 2012 and sold before the middle of 2016. Recent evidence points to a drop in market value of anywhere between 7% and 12% since that time. Given historical patterns, buying now during the market correction makes you likely to come out ahead five years from now.
I do strongly believe that the motivation for buying a home should always be the desire to live there. Even though New York is still primarily a rental city, the best properties can usually only be owned, not rented. And while real estate certainly counts as an illiquid asset, that can also work to its benefit. Values don’t sway as deeply or as quickly in housing as they do in stocks. As Mr. Engquist suggests, you can’t live in your stock portfolio. But you CAN make money on your home, even while you happily reside there.
If you want to read Erik Engquist’s article in Crains, here it is: http://www.crainsnewyork.com/article/20180313/OPINION/180319973/op-ed-your-home-is-not-an-investment