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Does homeownership build wealth?

By Judy Martel · Bankrate.com
Monday, August 30, 2010
Posted: 11 am ET

In my last blog, I wrote about whether only the rich could afford to buy a house.  Here's another question analysts are pondering in this real-estate environment:  Is homeownership a means to build wealth anymore?

During the past 50 years, despite a few housing declines, it's become generally accepted among buyers that a home was more than a simple shelter; it was a financial investment in the future. A few of my friends told me during this past real-estate bubble that they were staking their entire retirement on the value of their home. With prices skyrocketing year after year and homes selling before they were even on the market, the strategy seemed like a no-lose proposition to them. Now, of course, the flaws in that plan have become painfully evident: not only in lost real-estate value, but in the fact that homes are not selling quickly or at all in this market.

In a sobering article in the New York Times, Dean Baker, co-director of the Center for Economic and Policy Research, estimates it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

Short-term news for the housing market is just as bad, if not worse. New-home sales fell 12.4 percent from June to July, according to the Commerce Department. The number is 32.4 percent below what it was a year ago, and The National Association of Realtors reported that sales of existing homes are at the lowest level in a decade.

Home values have always been cyclical, and in previous prolonged recessions, notably 1973 and 1982, residential construction declined, but some analysts believe the current housing crash is not only more severe, but may have been the cause of the 2008 recession, unlike in past recessions.

What do you think: Is homeownership a means to build wealth going forward? Are you counting on your home for all or part of your retirement?

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August 31, 2010 at 9:16 pm

I bought my house in early '98 and paid $150,000 - the value peaked at $550,000 in '06 and today it is worth $350,000 (I lost $200,000 in value in the crash).

My neighbor who owns the exact same model rented his house out for $1,500/month in '98 - today he rents his house out for $2,000/month - I live in Northern California - I never took out a 2nd mortgage during the boom. I have no interest in selling and becoming a renter again - renting is too expensive.

I am also a firm believer that property values will eventually start to rise again. Hey! the world population is predicted to hit 7 billion people next year (and 10 billion people is not too far away either) - that is a scary thought if you ask me.

August 31, 2010 at 12:04 am


I liked your example of house as "investment fund", but there is one place it breaks down. The "investor" needs some place to live, and the alternative is generally paying rent. Therefore, the "investor" would also have to take into consideration that if you choose to not buy this fund, you will be required to still pay into much of it each month, for the rest of your life, with no return on investment...you will instead be buying a large portion of this fund for someone called a landlord...until you die. From that point of view, it might be crazy to not buy the fund.

August 30, 2010 at 6:02 pm

We all know national figures are flawed in regards to this. Unlike the stock market, RE is not as transparent and liquid. There are far too many things to predict when/if a homeowners wealth will come back.

However, the article is good because I think there are/were stupid people who lived by the lowe's commerical..."your home is your biggest asset". hmmm? uh, no. Your income and the ability to earn it is MOST people's greatest asset.

In answer to your questions. 1) Means a little. A live in an area where there will still be people moving here and jobs being created. (We hav and always have had a lot of international buyers.) 2) No, I never and have never depended on it for retirement.

August 30, 2010 at 4:50 pm

I suppose that if you bought a house in the peak of a bubble market then you made a poor investment. The same goes for the stock market. All real estate is local. I am a builder, and our family bought a used house in 2009. We were planning on building new, but used real estate was so low that building new made no sense even being a builder myself. If our city grows in the next five to ten years then at some point the supply of current houses on the market will get bought up, then prices will have to rise 20-30% (or higher due to inflation and tougher building codes) because new houses cost that much more, and they will have to be built.

Susan Kron
August 30, 2010 at 4:47 pm

Imagine a broker trying to sell you on the following investment:

A fund that if held over 30 years will probably net you not more than the rate of inflation. You, the average person, are lucky because you can borrow to get into this fund; you can pony-up 20% or more of its value but you will need to borrow a couple of points above the current inflation rate to do that. To get into the fund will cost you even more if you can't part with at least 20% cash. And by the way this is both a front load and back load fund, as it will cost you significant transactional costs to get into this fund (closing fees, taxes, etc.) and you will probably pay at least 6% to exit the fund in the future. And then there's an average maintenance cost of 1 to 3 percent per year, just to keep the fund in good shape. And you will always be paying taxes on the value of the fund while you have it.

The benefits of leveraging to get into this fund? Instead of paying certain taxes to the U.S. and your state, you get to pay that money to a banker. Any profit you have on selling this fund can be rolled tax free into a similar fund only. And after you've paid off what you borrowed just to get into the game, you own the fund outright, subject to those same taxes and maintenance which will never go away.

You'd have to be crazy to 'invest' in such a fund.

But for a house this is something many of us are willing to do because it is more than an investment. A house is a terrible tax shelter, probably will get horrible returns over time, costly on a year to year basis and for most people is probably not the best diversification strategy (holding REITS might be better). But it is an asset that is (or someday will be) ours -- we are the CEO of it and can to some limited extent determine its destiny.

Counting on a home for retirement? If it's got a nice porch and an idyllic view -- perhaps. But more important will be the (hopefully) many wonderful years spent in that home where it was one of many places a family has over the course of decades been able to convert earned money into valuable assets.

A home is probably one of the few tangible assets most people will ever be able to own and control, an asset that has at least a chance of holding its value over time. Just like most financial options available to most people it is really quite costly.

But most would agree happily worth it, and that's all that really matters in the end.