Yale Economist Robert Shiller was on Bloomberg Television recently, talking about the housing market, its impact on the economy, and whether housing is a good investment. It was a fairly dry discussion in which the co-creator of the widely followed S&P/Case-Shiller index of property values explained why he’s not optimistic that home prices will appreciate back to levels seen before the recession.
However, about four and a half minutes into the interview, the conversation took a very interesting turn. After listening to his cautious views on the housing market, one of the Bloomberg hosts asked Shiller, “Then why buy a home? People trap their savings in a home. They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?” To which Shiller responded, “Absolutely!”
No Different Than Buying a Car
While Shiller framed the discussion in terms of viewing a home as an investment, his words have relevance for all homeowners or those who want to own a home some day.
“It takes maintenance, it depreciates, it goes out of style,” he explained. “All those are problems. And there’s technical progress in housing, so the new ones are better. So, people might just decide, ‘Yeah, I’ll diversify my portfolio; I’ll live in a rental.’ Very sensible thing for many people to do.”
He said that once you account for depreciation and maintenance, the real appreciation for housing historically has been zero percent. As he became noticeably more animated, Shiller went on to compare buying a home to buying a car, putting it in storage for 20 years and then trying to sell it.
“Obviously not a good idea because people won’t want our cars,” he said. “It’s the same with our houses… Any homeowner knows that you can’t sell a home with 30-year-old roofing, carpet, and kitchen appliances. Sure, the home price might go up, but you have to adjust for years of maintenance and renovations.”
Shiller, who owns two homes, said there certainly are personal reasons for home ownership, but it’s tough to make an economic case.
Rethinking the Conventional Wisdom
The conversation called into question a recession-weakened but still prevalent part of the personal finance conventional wisdom: home ownership is a good thing.
At the risk of demonstrating how firmly entrenched that conventional wisdom is within me, I believe home ownership still makes sense—even economically—for certain people: those who are confident they’re going to be in the area for the foreseeable future, put at least 20% down (to avoid paying private mortgage insurance), keep their monthly payment (for the mortgage, property taxes, and insurance) to no more than 25% of monthly gross income (preferably on one income), have money allocated in their budget to keep the home well maintained, and plan to have it paid off by the time they retire.
If you do all that, you’re assured a mortgage-free place to live in your later years. Of course, you’ll still have to pay for property taxes, insurance, and maintenance, but the mortgage is usually people’s biggest housing expense.
But I can see the value of rethinking the wisdom of home ownership. If you don’t get the numbers right, the house can own you, wreaking havoc with your finances, health and relationships.
What are your thoughts on home ownership? Is it an inherently good goal to pursue? And how has the recession impacted your views?
Matt Bell is Associate Editor at Sound Mind Investing. Since its founding by Austin Pryor over 22 years ago, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice.
Publication date: May 1, 2013