Monday, January 3, 2011

On House Ownership

Before reading the post that follows, chew on these facts for a moment: in 2005, 72.4% of all white Americans owned their own home. Among the two largest ethnic groups, blacks and Hispanics, approximately 50% of each group owned their own homes. This is a huge increase over the decade before. Even with the economic problems we have now home ownership has remained steady and has even risen a bit--one person's misfortune being another person's fortune.

Using the strictest definition of luxury, some people believe that owning a house would fall in the category (looking at that 72.4% figure above, a whole lot of people aren't considering it a luxury). Shelter is a requirement or necessity, but there are many options for shelter other than an owned house. In the ongoing discussion of tuition assistance house ownership has come in for a great deal of flack. The feeling of many is that people look at their scarce resources and elect to put those resources into buying a home, thus making it necessary for them to ask for tuition assistance from the yeshivas. They believe that this is wrong, and that home ownership should take second place to paying full tuition. If you do not have money to both pay for the house and pay for the yeshiva then the house should not be purchased.

On a different side you have those who look at home ownership as a type of investment, a type of savings plan. Rather than giving rent to someone else, money that you will never see again, mortgage payments are an investment in something that will pay off in benefits both now and in the future. You get to use the house for shelter now, and you will own the home when the mortgage is paid off, thus allowing you to sell it, if desired, and use the money for other things. Some people feel that this is no different from having a 401(K) or 503B. The house is part of a retirement plan, either because you will have a free and clear domicile to live in in the retirement years or you will have a property to sell that can help finance those retirement years. (And yes, if a strict emergency arises, you will have an equity property to borrow against if necessary.)

Again, there are some on the other side of the argument who will say that funding retirement at the expense of tuition payment is not a fair or equitable trade off. They don't feel that funding a 401C should be done if you can't pay full tuition. Frankly, I find this argument to be a rather specious one. Generally those who take the no-savings position also tell you that you will have plenty of time to garner those savings when you have finished paying tuition for your children. Would someone please register those people into a basic course on finance, and begin by teaching the time table for compounding.

There is a fallacy in the anti-house group commonly known as "either-or." This group is assuming that it must be either a house or tuition payment if there is not enough money for both. What if the reality is that it is not an either-or situation? What if both could be considered as necessities for the majority of people? What then? Then the question would be how can both be financed on limited funds.

Let me state the obvious: if there is only X money and you want two items, each of which cost that X, you are going to need to find cheaper alternatives for both of those items. Re the housing, there are many cheaper alternatives available. Pick a community where houses cost less. If such a community does not exist where you believe you want to live, choose a different place to live. Buy less house, either smaller or less fixed up. Consider buying a two-family house so that the rental income will reduce your out of pocket expenses on the house. Consider a coop or condo if a free standing house is still too costly for you. Re the school tuition, if that tuition is a make or break item for you, look around and see if there are schools somewhere that charge less than others (yes, there are some). Yes, commute time may be a factor with some of those less expensive schools, but then you need to weigh the time against the money and against the house you want. Are there other, less traditional options for schooling available that would cut the cost of tuition considerably?

Frankly, I believe that if we would stop arguing about home ownership (and yes, savings plans also) as being a luxury we might be able to concentrate on reducing tuition. As long as schools look at homes and savings as luxuries, there is no incentive to reduce tuition. If they see these things as optional, they have no problem telling parents that tuition will not be reduced--sell your house or stop saving. As long as schools see themselves as THE most important thing that parents have to spend money on, they have no reason to watch costs and to cut items out of their budgets.

As for parents (and prospective parents), they, too, need to be realistic. If a particular school is what they want for their children, but the neighborhood that school is in does not have any reasonable cost housing for sale, they are going to have to rethink both the school and the neighborhood.

In short, the argument about tuition versus buying a home needs to be seriously re-cast to take into consideration what the majority of people in our country think of as necessities for its citizens. If owning a home and paying yeshiva tuition are BOTH looked at as necessities, then how will they both be paid for?


SubWife said...

Just making a side point. I have read an article some years ago where the financial magazine author claimed that buying a house is one of the poorest investments one could make, even before the real estate slump (and over a 30-yr mortgage, there's got to be one or two of those). If one rented and put the difference between mortgage, insurance, repairs, etc into a sound investment, one would be better off financially because on average over a long period of time, stock market does significantly better than real estate market. His point was that if one wants to own a house, one should do it for reasons other that a good investment strategy. There were graphs, if I remember correctly, proving his point. Unfortunately, don't remember which magazine.

Unknown said...

Last year was bizzare for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.

home buyer

Anonymous said...

Subwife is correct, but with the caveat that it also depends on the luck or good sense of when and where you buy and sell that house. However, no one should consider a home their retirement plan, for at least two reasons. First, you might need to sell and tap into that retirement plan in a down market. Second, if you sell, you will still need money for somewhere to live. If you aren't adequately funding a 401(K)/IRA, etc. you are going to be in some trouble at retirement time even if you have a home to sell, unless that home is a paid-off million dollar + home.

Anonymous said...

I agree with ProfK that the issue shouldn't be home ownership v. renting, but one of how much home, where that home is and how expensive it is. I would also add the question of when to buy. Too many people may have bought too soon. You should be able to save enough for a 5-10% down payment (10% is better)AND have a good size emergency fund to cover things like the roof that leaks, the furnace that goes in the middle of the winter.

Anonymous said...

Please correct 401C to 401(k). You are clearly an educated woman, but a careless error like this takes away from your message.

Please note that I would not leave this comment on a blog that is not as well-written as yours.

Primum Non Nocere said...

There's a reason that homeschooling is on the rise in the Orthodox Jewish community. Given the high average number of children in a family and the average cost of tuition, contrasted with the average income, it seems like an obvious solution. Granted, it is not for everyone, but I think that (a)it would work well for far more people than consider it, and (b)the more people who choose to homeschool, the more socially accepted it will become and the more options will become available to those who do choose it.

As a parting note, be careful not to confuse cause and effect when looking at the often discussed correlation between homeschoolers and quirkiness, for lack of a better term.

Primum Non Nocere

ProfK said...

Thanks Anon, error fixed.

Everyone please keep in mind that the posting doesn't say a house as the only investment being made--that's house plus other savings as well. In the context of a diversified investment portfolio, the house works perfectly fine, as long as the investor is savvy and looks at the house cost realistically.

Anonymous said...

May be one of the differences in looking at a house comes with how old you are. Back in our day Prof there were only fixed mortgages not variable ones so we knew up front just how much our houses would cost us year to year. The tax advantages were also better than what the government is looking to do now.

We looked in Brooklyn when we were first buying a house. We figured we could handle about %85-90K in house price. A semi-attached in Midwood with almost no property but the house was going for about $86k then. A semi-attached in Queens would cost us about $45k. We bought a semi-attached, both sides, and got the price at $88k with a little bargaining. We rented out one unit and lived in the other.

Surprise, surprise, three years ago we sold both units for about $1.27 million. Even after taxes (and keep in mind the break for first time house sale) and taking into account money that had come in in rent and gone out on fixing up, we cleared $890k. That bought us a nice 3 bedroom condo in a sunbelt city and a 1/3 share with my sisters of a large apartment in Israel that we all use. And that left us with $670k in cash to finance not only any expenses on the two places and travel expenses but with money left over for other things.

No a house shouldn't be the only way families save, but it can be one of the ways and if you're smart it can give you really nice dividends.

Rita said...

Anonymous, the last one, I'm guessing that you bought somewhere in the 60s or maybe early 70s. So maybe a fixed mortgage in the 3-6% range? I know that house prices went up a lot since then, which benefits those of us who bought around then. But you're not going to see that kind of growth today.

You had your house about maybe 35 to 40 years? The person who bought your house at around $600 thou is not going to see that house worth 13 to 14 times what they paid for it 40 years from now.

So a house as an investment, maybe the key is how much did you pay for it initially. How likely is that house to go up more than double in value or triple or quadruple? A savings account at 5% doubles every 12 years. Will the house you are looking at be able to do that over the time period you are looking to own it? If that's not likely you need to look for a cheaper house and probably a cheaper neighborhood if you want to collect any intrest on that house when you sell it.

Miami Al said...

Over the LONG Run, housing normally appreciates at around the wage growth rate, inflation + 1%. In the short run, who knows. In the time most people own a home, it's less than inflation...

A graph showing housing prices back to the Civil War (when we started having useful records in this regard) showed 3 booms, post-Civil War, post-WW2, and 90s/2000s booms. Outside of those windows, housing prices appreciated slightly less than inflation, those booms made up for it however.

However, the rent vs. own ignores a few things:
1: people are TERRIBLE savers
2: homestead protections, Florida, Texas, and a few other states protect your home in case of bankruptcy
3: financial aid calculations, for both Yeshiva AND College, take home ownership costs into consideration

Regarding the Yeshiva fight... the fight is that basically, if you go house poor and buy a house with a big mortgage, your tuition reduction will be increased by your mortgage payment... i.e. if I rent for $2000 instead of carrying a $3500 mortage+taxes+insurance bill, the Yeshiva figures that I have another $1500 to pay for tuition.

As a result, that big fancy mortgage is effectively paid for by the other parents.

If I rent and save the $2k/mo in a savings account, the Yeshiva will expect me to exhaust that before getting financial aid. However, none will expect me to give them the equity in my home directly.

Housing is a pretty good inflation hedge as well.

In addition, what all the calculations ignore is that housing is the ONLY investment where normal people are able to get leverage, going 200% long in the stock market is VERY risky, while going 500% long (20% down mortgage) was very conservative until a few years ago, and 3300% long (3% down) was possible as well.

If inflation runs 3%, housing goes up 4%, and I put 10% down on a house, I've made 37% on my investment in year 1 ($100,000 home, now worht $104,000, I invested $10,000 and now have $14,000 in equity, worth 3% less because of inflation). In a "normal" up market, housing is a "great" investment for more "normal" people.

Even at inflation -1%, it's a good investment (I'd have $12,000 in equity, after inflation, still a 17% return).

So yes, housing makes sense, but the Yeshiva mess is forcing EVERYONE to overleverage, overbuy housing, and therefore bubble the housing market since everyone is willing to overpay because they don't care.