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Americans' homey savings accounts -- their homes
By Jay MacDonald • Bankrate.com
 For
most Americans, there is no place like home -- to save.
According to the Federal Reserve, homeownership
steadily increased throughout the prosperous 1990s. A record 67
percent of all U.S. households now own their homes. It was, is and
probably will remain the great American dream.
In a survey by the American Enterprise Institute,
88 percent of the families polled rated owning a home at the top
of their wish lists -- a choice that even beat out a happy marriage
and having children. Fannie Mae's national surveys find that typical
adults are willing to take a pay cut or relocate to another city
if it will enable them to buy a home rather than rent.
"Homeownership is still the primary source
of saving for the vast majority of Americans," says Keith Leggett,
senior economist with the American Bankers Association. "If
you look at nonfinancial assets, housing probably comprises about
60 percent of total consumer assets."
We may gladly part with that 5 percent to 20
percent down payment and sign on for a 30-year mortgage to get the
homes of our dreams, but when it comes to socking away a few bucks
for a rainy day, our national savings rate is near 0 -- among the
lowest in the developed world.
The reason is simple: We don't think of our
home strictly as an investment -- say, the way we might look at
our equity portfolio.
"You can't go swimming in the backyard
of your IBM stock certificate," says Ilyce Glink, author of
100
Questions Every First-Time Home Buyer Should Ask. "Stocks
are great and the stock market is great, but it isn't any place
you'd be able to relax after a Sunday dinner. People live in a home
not just to have some shelter but because there is a deep emotional
attachment to a home that you don't have with your stock certificates.
That's what makes investing in a home a unique investment."
The classic no-brainer
It doesn't take many rent payments to figure out why buying a home
is the classic no-brainer. It's all about the equity; owners build
it, renters do not. Whether you rent for a year or 30 years, you
will never own your place of residence. As a homeowner, however,
you're working toward that day when you can burn the house note
and claim your home outright. In addition to never again having
to pay to keep a roof over your head, in all likelihood that roof
will have appreciated well ahead of inflation, providing you with
a nest egg to last your lifetime.
Sure, there are advantages to renting, especially
if you're young. Renting provides flexibility, mobility and liquidity.
You'll part with less up-front cash to move in. When your lease
is up, you just walk away. Something breaks, it's the landlord's
problem. Your furniture, utilities and yard maintenance may be included.
And you'll never get a tax bill.
But once you have the money to buy, it will
probably make sense to do so. You'll be putting equity and appreciation
to work for you, receiving a tax break on the interest portion of
your mortgage payment, having complete freedom to remodel and redecorate,
and likely facing a monthly nut that's the same or less than what
you've been paying to rent.
"It's pretty hard not to do it unless you're
really moving around so much that it just doesn't make sense,"
says Fred Flick, vice president of research for the National Association
of Realtors. "Once you throw in the taxation advantages and
the (equity) leverage effect, it's pretty hard not to decide to
buy."
Would you gamble your
house?
Creature comforts aside, how does your home stack up as an investment
against, say, your mutual fund? Not very well these days, according
to the ABA's Leggett.
"We looked at what has happened to the
price of new homes as well as existing homes over the past 10 years
and found that the stock market has well outperformed homeownership
as far as rate of return by almost five times annually," he
says. "Homeownership prices have only been appreciating about
4 percent per year over the past decade while the market, based
on the S&P 500, has been appreciating at almost 20 percent per
year for the same period of time."
That may explain in part the Fed's recent finding
that, for the first time in history, Americans now have more money
invested in the stock market than they do in their homes. It's not
that 4 percent appreciation on homes isn't attractive -- in fact,
it's at the upper end of the 1 percent to 4 percent average annual
home appreciation since World War II. But the double- and triple-digit
earnings of the raging bull market of the late 1990s, combined with
the proliferation of new investment choices, has prompted a few
adventurous homeowners to get creative with their home equity.
"Housing is a form of nonliquid wealth
that has become actually more liquid over time," says Leggett.
"People now can tap into the wealth that's in their house and
turn that into a good vehicle for generating more wealth. A decade
ago, nonfinancial assets made up about 70 percent of household total
assets verses 60 percent today. This is reflecting the aggressive
growth that has taken place in the stock market."
Risky business
The Fed notes that less than 2 percent of cash-out refinancing --
refinancing in which the owner ends up with a lump sum -- was spent
on stock market investments, although the median amount invested
was just $10,000.
"It is a risky proposition," Leggett
warns. "You always worry that people will put their house at
risk because they have used their equity to make a high-risk gamble.
But when it comes down to their house, most people are very conservative.
That's where their net worth is tied up. That's their nest egg.
I think most people would say that is something they would not do."
Flick expects housing to remain strong, even
if the economy does not.
"The stock market, as we're seeing, could
flatten out. Housing doesn't seem to be quite as volatile. Housing
prices have increased 3 percent to 5 percent annually over the past
40 years. As the economy slows down, that could drop down to 2 percent,
but that is still a healthy rate of growth."
Despite all the New Economy hype, Glick says
housing could be your best sure thing.
"In the last seven years, depending on
where you live, you could have had your cake and eaten it, too --
you could have lived in a great house and seen 20 percent
annual appreciation in your home. People are amazed at how much
money they have made in the housing market, but again, you don't
get any of that money until you sell."
She warns not to lose sight of what we buy our
house for: a home, a place for family memories, cherished gatherings
and a safe harbor in the world. What price are you willing to put
on that?
"You're achieving a major financial dream
and the trade-off for that is some of the appreciation that you
would have seen if you were living in a one-bedroom apartment with
your entire family and plunking everything you had into the stock
market. There comes a point in your life to reap what you have sown.
If you just leave it all in the market and you die, where has your
pleasure been?"
Jay MacDonald is a contributing
editor based in Florida
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