American Dream Reloaded
I came across this article Dispelling The Myth That Home Ownership Is Your Best Investment over at Millionaire Mommy Next Door. Already, I can tell that this blog will be a favorite! She’s challenging some well established views about the road to wealth in America. One of those being that buying a home is the “American Dream”.
Wow! Get ready to be challenged because she kicks a$$!
Don’t get me wrong, I have no regrets in buying our home. However, given the current market trends, especially here in the DC metro area I have started to think about whether or not it was truly a wise financial decision. I love the house, neighborhood and stability of knowing that this is ours and I dont have to answer to a landlord but there are some truths in her main points. I think if we can move away from the emotional aspect of buying a home we will be able to dissect whether or not it is a wise decision. And, of course there are so many variables to consider: current market, market projections, status of the mortgage industry, economy etc etc.
But let’s look at a few of the more salient points:
The Motley Fool, The Worst Investment Ever:
“Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.”
We typically think of our homes as investment vehicles which will take get us on the path to wealth. But I would caution this line of thinking especially in a market like today’s. I think five years ago many of us were singing a different tune given the incredible real estate boom we experienced here in DC. However, when you factor in home inspection fees, Realtor fees (you should know that the buyer is really paying this!), closing cost fees, HOA fees, maintenance, taxes etc etc it really chomps away at your bottom line. I’m not advocating going out and selling your house, but think about what you are putting into it financially and how much you stand to make when you do sell.
Homeowners typically only thinking about profit in terms of purchase price-resale price=profit. Not so fast. You’ll need to add in all of the above to really determine if you’re making a profit. Again, this is specific to local markets and individual situations. I just want you to be well informed.
Wall Street Journal, Your Home Isn’t the Nest Egg That You May Think It Is:
“Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house.”
“the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation.”
This hurt when I read it. Think about it, you don’t truly own your house until you pay the last dime on your mortgage. When you do pay off your mortgage you’re paying back a ridiculous amount of interest when you could be paying yourself first instead of the bank. When you consider that if you borrow $100,000 for 30 years at 8% you will end up paying the lender over $264,000 ($100,000 principal loan amount and $164,000 in interest). Isn’t that amazing? We’ve never been challenged to think otherwise! Just that buying a home=American Dream. If one were to take the same mortgage payment and invest in lets say the stock market which Ive read has average returns of around 7-10%, we could be paying ourselves that interest over 30 years. Of course Im not taking into consideration taxes and the like but I’m sure whatever you pay in taxes is less than the annual property taxes, insurance and maintenance on a home. This really revolutionizes Pay Yourself First school of thought.
“It may be late for a lot of homeowners to read this, but here it goes anyway: It’s risky and bad planning to have too much of your net worth in your principal residence. No prudent stock-market player would put 60% or 70% of a portfolio in just one stock, but millions will hold that much or more of their total net worth in just one house.”
Gosh I’m being slayed here. With the little I do know about investing, I know that you never put all your eggs in the same basket. so why do we do that in the case of our homes? We are often advised to DIVERSIFY our portfolios so as to avoid losing everything should one part of the portfolio tank. Right now I know so many homeowners are feeling the bite as the market slumps and the value of their homes depreciate.
OK. BREATHE!
What’s the lesson here? Think through each and every major financial decision and decide whether or not it will net a significant profit given your individual situation. The American Dream is great in that you feel invested in the economy’s growth and being a part of something larger, however will it truly take you on the path to wealth? If so, know when to jump ship. Right now I’m sure many wish they’d jumped ship 18 months ago and must wait for this slump to pull through. If you’re thinking about buying, ascertain what this will mean for you? Is it simply the achievement of buying a home or are you banking on the fact that your home’s value will increase and net a profit when you sell? Consider what you will put into the home after the purchase: taxes, insurance, maintenance, upkeep etc etc. I don’t know the answer as I’m still reviewing our own situation because I’m in total moneymaker mode right now. But, this isn’t to dissuade anyone from buying a house. Like the original author of this article, I am only here to impart information and hopefully educate in the process. Make the right decision for you, not one based solely on the “Dream”.
Have you bought into the American Dream?
Technorati Tags: mortgage industry, The Motley Fool, Mortgage interest, American Dream, principal residence
About the Author: Girls Just Wanna Have Funds is for the woman that wants to take charge of her personal finances. We value budgeting, investing, frugality and remain mindful of our spending habits. Move over and make way for women who are in control of their financial destinies and not afraid to say it. We're armed with a positive net worth and not afraid to flaunt it while breaking financial ceilings one stiletto at a time!
Amy | Jan 16, 2008 | Reply
Stop playing with my mind! I never thought about it this way!! So should we buy or continue renting? Is this temporary?
Millionaire Mommy Next Door (5 comments.) | Jan 16, 2008 | Reply
Hi Ginger,
I appreciate your nice introduction to my somewhat controversial rent vs buy thread! Your reaction and discussion is a breath of fresh air. Some people shut down when they hear something they don’t want to hear - but not you. Kudos for looking at the issue open-mindedly, even if some of it hurts a little. In the long run, looking at both sides of the coin (pun intended) and making informed decisions does kick a$$.
I love your blog name! And your writing style is fantastic, too. So nice to “meet” you!
Ginger | Jan 16, 2008 | Reply
Hey lady!
Yes I am combing through your site as you are such a wealth of information and an inspiration. Truly. Your contrarian views give us all something to think about because there is no ONE path to wealth. You blazed your own path which shows me that this can be done! Excuse the gushing lol
Thanks for stopping by!
Greg | Jan 17, 2008 | Reply
Interesting information you have here Ginger. Im forced to reconsider my position on wealth building as I am an investor and suffered losses recently with a few of my properties. However I suspect this is all specific to one’s local area.
Natasha | Jan 17, 2008 | Reply
Wow. My husband brought this very point up to me earlier today and I didn’t get it. I told him I needed to have it marinate until I “got it”. Oh, I sooooo get it. But renting is also risky; meaning that a landlord can raise rent at any time. Is it unheard of to have a 5, 10, 15 year residential lease?
Ginger | Jan 17, 2008 | Reply
LOL! @ Natasha Ive never heard of it but Im certain they wouldnt mind. The longest Ive heard is a 2 year lease.
Greg I am glad you’re open to the idea. Sometimes it takes being challenged in order to pull ourselves away from traditional modes of thinking.
K. (2 comments.) | Jan 20, 2008 | Reply
We read the same sites
Nowadays it seems like you should buy a home for no other reason than having a place to live for a good period of time. Millionaire Mommy made a good point about not having ALL of your investments/net worth tied up in your home.
Young Investor (5 comments.) | Feb 25, 2008 | Reply
Hey Ginger,
Well I’m from Australia but we have the Australian dream here too! I love what this multi-millionaire mummy has to say and I absolutely agree with it 100% no questions asked.
I believe this because from all the successful people that i have spoken to and all the books that i have read, they do not see your home as a great investment at all.
I guess we are taught from a young age that this is what we should aspire to. Live an average life, fit in, go to school, get a good job, buy a house and settle down.
I don’t know about you .. but that sounds like a completely boring and useless life to me. Life really is all about raising the standards and expecting more from yourself than anybody else does. Sometimes you just have got to grab life by the balls .. and run with it. lol If there was a nicer way to say it .. i would have.
So i think that its great that you were opened minded enough to see the benefits in renting v buying. I mean if you want to be a millionaire that already puts you in the top 4-5% of the population. In order for to do that .. i guess we cant be thinking like the other 95%.
Young Investor
http://www.investmentrealty.blogspot.com