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Investing and Economics Blog

The Value of Home Ownership

Home Ownership Shelter, or Burden?

The collapse in house prices matters most directly to two overlapping groups: those who bought property at the peak of the market and now face “negative equity”; and those (in America) who took out subprime mortgages. Roughly 10m Americans are in negative equity—ie, the cost of their mortgage exceeds the value of their home. In Britain about 3% of households are in negative equity. For homeowners, negative equity makes houses more like a trap than a piggy bank. Those who cannot meet their payments lose their house, their savings and (in America, usually) their credit rating for seven years.

The other area of concentrated distress is subprime mortgages, which increased their share of the American mortgage market from 7% in 2001 to over 20% in 2006. According to the Mortgage Bankers Association, the delinquency rate was 22% in the fourth quarter of 2008, compared with only 5% for prime loans.
…
“Perhaps the most compelling argument for housing as a means of wealth accumulation”, argues Richard Green of the University of Southern California, “is that it gives households a default mechanism for savings.” Because people have to pay off a mortgage, they increase their home equity and save more than they otherwise would. This is indeed a strong argument: social-science research finds that people save more if they do so automatically rather than having to choose to set something aside every month.

Yet there are other ways to create “default savings”, such as companies offering automatic deductions to retirement plans. In any case, some of the financial snake oil peddled at the height of the housing bubble was bad for saving.

The debate over whether home ownership is a wise investment or not, is contentious (more so in the last year than it was several years ago). I believe in most cases it probably is wise, but there are certainly cases where it is not. If you put yourself in too much debt that is often a big problem. I also think you should save a down payment first. If you are going to move (or have good odds you may want to) then renting is often the better option.

The “default saving” feature is one of the large benefits of home ownership. That benefit is destroyed when you take out loans against the rising value of the house. And in fact this can not just remove the benefit but turn into a negative. If you spend money you should have (increasing your debt) that can not only remove you default saving benefit but actual make your debt situation worse than if you never bought.

Related: Your Home as an Investment – Nearly 10% of Mortgages Delinquent or in Foreclosure – Housing Rents Falling in the USA – Ignorance of Many Mortgage Holders

April 16th, 2009 John Hunter | 4 Comments | Tags: Economics, Financial Literacy, Investing, Personal finance, quote, Real Estate, Saving

Comments

4 Comments so far

  1. Anonymous on April 18, 2009 6:52 am

    I still remember all the talk several years ago about how much real estate prices were going up. Home ownership was viewed as the path to wealth. Today, there’s a lot of talk about the benefits of renting over owning a home. It’s funny how we forget the past, in good times and in bad. We’ve owned a home since 1993, and it’s provided us with financial and other benefits I wouldn’t trade for anything (even as we watch the value of the home fall like a rock).

  2. Anonymous on April 22, 2009 6:26 pm

    I think home ownership is a long term investment.
    A home appreciates at a typical annual rate of five percent and the homeowner who made a cash down payment of 10 percent generally will receive a 94 percent return on that cash after owning the home only three years, 225 percent after five years and 623 percent after 10 years.

    Tax advantages to home ownership include interest payments on mortgages and property taxes in most cases, home equity loans which may also be used to consolidate debt, thereby making all the debt interest tax deductible.
    Thanks.

  3. House Prices Seem to be Stabilizing at Curious Cat Investing and Economics Blog on October 4, 2009 8:28 pm

    […] The Value of Home Ownership – Housing Prices Post Record Declines (April 2008) – posts on economic data – […]

  4. The Potential of Iskandar is Very High but Investing in Iskandar has Risks | Johor Bahru Real Estate on December 5, 2011 11:39 pm

    […] Penang’s Economic Gains – The Value of Home Ownership – Strong Singapore Dollar This entry was posted in commentary, Housing, Singapore and […]

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