Saturday, August 21, 2010

Seven Reasons to Buy a Home

James Altucher, who I highly respect, recently wrote an article for DailyFinance called Seven Reasons Not to Buy a Home. In this case, I think he is wrong, on all seven counts.

Everybody should always consider buying a house. Owning a home can be the 'American Dream,' and it's always been that way. Here's why.

1. The mortgage interest deduction. You can't deduct your rent payment. Whereas the interest on a mortgage is deductible and probably will be one of the last tax benefits to be taken away by Congress, unless we are lucky enough to go with a straight flat tax.

2. No rent increases. Unless you have an adjustable mortgage, which I would never recommend anyone get, your cost to stay in the house is fixed for thirty years or less. Thirty year mortgages with no prepayment penalties are the way to go because you can 'create' your own 15 year or 20 year mortgage by paying additional principal each month; and if you run into financial problems and can't make those higher payments for a certain period of time, you just stop making those over-payments.

3. Not at the mercy of a landlord. Who would you rather have control over when you need to move, your landlord or yourself? If you are on a month-to-month, and your landlord's brother-in-law is coming in to town next month and needs a place to stay for a year, you will get a thirty day notice telling you that you now have to start looking for a new place, get an estimate from movers, pack your stuff up (boy do I love packing for a move – NOT), and then actually moving. Even if you have a one or two year lease, the landlord can still do the same thing prior to 30 days of the end of the lease.

4. Has bailed out many retirees. I keep hearing about retirees who lost most of their earnings in their stock portfolio after the market crash, yet because their house was paid off or almost paid off, were able to sell their home, buy a much smaller place, have plenty of cash left over, even after the real estate crash.

5. You can do what you want with it. Suppose you want to paint the interior of your house purple with pink polka dots. If you rent, your landlord will go nuts. Same if you want to knock out one of the walls to open up the living room area. When you own your own home, you can be the one to go nuts.

6. If you can't afford it, you can walk away from it. Many people weren't aware of this until the big real estate crash that started in 2005. Now the whole world knows. Almost every mortgage is a non-recourse loan; doesn't matter whether it’s a conforming loan, a non-conforming loan, an FHA loan, or a VA loan. What non-recourse means is that the bank can't come after your personal assets if you walk away from the loan and the sale of the house can't satisfy the balance due on the mortgage, unlike an auto loan or a credit card debt, which are recourse loans.

7. The return over long periods of time far outpaces any other investment. This is probably the most important reason of all. Let's look at the hard numbers. One of the major mistakes that almost every major publication has made is comparing the growth of real estate versus the growth of the stock market, without taking into consideration that with real estate, buyers only put up a small portion of the purchase price.
Almost nobody pays all cash for real estate; almost everyone puts down 10% to 25% of the purchase price (and I hear that some lenders are starting to offer 3% again). As for stocks, almost everybody pays all cash for stocks; the percent of people who buy on margin is very small, especially when you consider all the 401k and mutual fund investors.
So if you really want to compare apples with apples, you need to compare how and how much people invest in the asset. Let's look at a period when we've had a couple market drops in both stocks and real estate. How about from January 1987 to this summer.
The average annual return of the S&P 500 through May of 2010 is 5.9%. The average annual return of the Case-Shiller Real Estate Composite 10 Index over the same period is 4.0%, assuming homeowners pay all cash. However, if you assume that the homeowner puts up a down payment of 20% with a 5% mortgage, the real life average annual rate of return is 10.4%, almost double the return on stocks.

All that being said, I don't believe anyone should consider their home as an investment. A source of emergency funds, if absolutely necessary, but not an investment. If you can afford a home, seriously consider buying one.

By Fred Fuld at

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