Homes aren’t great investments any more but they’re still a nice place to live
- November 7, 2009
- 4 comments
- Posted in Latest Posts, Real Estate
Today’s housing market is made up of equal parts of joy and pain. Pain, for the people losing homes or paying the mortgage on homes worth half of what they paid. And joy for first-time homebuyers who can’t believe the bargains they see.
If you’ve been a renter and saved up a decent down payment—10 percent or so—you can buy a better house than you ever dreamed of owning. You need to put only 3.5 percent down for a loan insured by the Federal Housing Administration (most lenders and mortgage brokers have them).
Does that mean that homes are good investments today? Probably not. Historically, home prices stay pretty flat from year to year or rise just a little bit—roughly in line with the long-term inflation rate. There’s a bubble every now and then—one in the decade after World War II and another in the decade ending in 2007. That’s 10 years of frantic investment excitement followed by a generation of boredom and peace. In the 1970s and 1980s, people didn’t think of their homes as an investment—just as a comfortable place to live. That’s the state of mind we’ll be returning to, once the memory of the bubble fades.
As investments, stocks do much better than residential real estate, over the long term. But stock portfolios are no fun to live in (lumpy beds, no picture windows). Buy a house for your personal comfort and pleasure and keep your extra money in a 401(k) or Individual Retirement Account. Homebuyers should plan to stay put for at least four or five years, if you hope to break even, or make a little money, after paying the commission you’ll be charged when you sell.
What if you’re paying the mortgage on a house that’s worth less than you bought? Keep paying. You’re effectively renting your house but you’re also–slowly, slowly—recovering some of your equity. If you’re happy there, can afford the payments and don’t have to move, you’ll eventually be okay. If you walk away from the house, you’ll wreck your credit rating. That can have unforeseen consequences in the years ahead. For example, you can’t get a low-cost federal PLUS loan to help send your child to college if you’ve defaulted on a loan or gone through foreclosure in the past five years.
Luckily, there aren’t any dangerous mortgages on the market today (except reverse mortgages for older people, which is another story). Lenders aren’t allowed to offer the deceptive and abusive loans that they touted during the bubble. When you talk to a lender, you can expect a range of pretty straightforward loans.
For tons of good information on mortgages, including refinancing and dealing with mortgage brokers, visit the website of my friend Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania: He’ll fill you in.
Tags: dangerous mortgages, first-time homebuyer, homes are good investments
I suggest that you highlight, as an active link, “reverse mortgages.” I need to read more on this since my elderly mother has been targeted as a candidate for an RM.
Great website. Thank you!
In my new book, you’ll find a big section on reverse mortgages. Young retirees should beware. The fees are high, the returns are small, and you’re stripping the equity out of your house. They’re best for much older retirees, 80+, who are healthy and want to stay in their homes. Here’s a helpful Web site: http://www.aarp.org/money/personal/articles/reverse_mortgage_basics.html
I like your Making the Most of your Money NOW book but have to disagree with the keep paying on your mortgage if your house is worth less comment.
We bought a place 5 years ago that we could afford with an adjustable rate mortgage in hopes that we would build a little equity and move up to the next place.
What a joke! Our home is worth 167,000 less than what we paid for it so we are unable to refinance it to a fixed rate. We did the math and it would take at least 15 years just to break even.
In the past 5 years we have gone from just the two of us to a family of 4. We have outgrown our home and do not want to raise our children in this neighborhood. We can’t rent it out for anywhere near our mortgage payment. We have called the bank and just get the run around because we are current on our payments and they won’t even talk to us unless we stop paying. So where did all of that government money go and who are the banks really helping?
I do believe in trying to pay your debts, if possible. On the other hand, neither do I believe that you should chain yourself to an impossible situation. More people are indeed walking away from underwater houses, for the kinds of reasons you cite. Unfortunately, your choices aren’t good ones. The banks (and the investors the banks have sold your loan to) generally find it more profitable to foreclose than to modify loans, which is why the government program is so slow. The industry simply isn’t cooperating. You will find it hard to get another mortgage if you walk away, so expect to take a rental for several years. However, if you build up a 15% or 20% downpayment, you might get a new mortgage earlier than you might otherwise expect. If you live in a “recourse” state, the bank can come after you for the part of the mortgage you left unpaid. In a “nonrecourse” state, the bank can’t come after you for the unpaid portion of your original mortgage but can pursue you for a refinancing or home equity loan. Use a search engine to fine out what type of state you’re in.
I note that big real estate developers are defaulting on loans and walking away, with no loss of status or business opportunities. So it does seem unfair for consumers to bear the moral burden when the big guys don’t.