Dennis' Mortgage Blog

Question of the week:  Is a home a lousy investment?

Answer:  This question came to me with an accompanying link to a Wall Street Journal article titled “A Home Is A Lousy Investment.”  To summarize the article, as you can guess by the title, the writer feels that buying a home is a lousy investment and using California and the Dow Jones from 1980 to 2010 a family would have profited more from their rate of returning investing in the Dow index than in purchasing the median priced home, and selling at the median price. 

In his article writer Robert Bridges surmises that society is doing a disservice to younger generations by putting importance on purchasing their home and locking into the expenses of home ownership rather than investing what would be their down payment and every month adding to the investment from the difference between their monthly rent and their cost of home ownership. 

Using the strictly financial premise of Bridges argument he could be correct, though I challenge his cost of homeownership versus renting for the past thirty years.  Assuming the home owner was not smart enough to refinance and lower the monthly payment at least three times since 1980 when the opportunity arose to lower the payment by at least two percent (in 1980 the 30 year fixed rate was 12.88%) each time, the payment on the median home was $875 per month, with Prop 13 the taxes would be fixed at $100 per month.   The rent for a two bedroom home passed $975 per month some time ago in California.  Then take into consideration the tax deduction for interest and property taxes and the cost of home ownership is lowered by approximately twenty percent in the first five years and declining thereafter.  In short after approximately five to ten years the renter will not be putting additional money into the stock market as the renter will be paying more to rent than the homeowner.  While the rental market may be soft in many areas of California today, in the 1990s and 2000s that was not the case and rents pushed up rapidly.

Someone who purchased a home with 20% down for just under $100,000 in California in 1980 and never accessed any equity and paid their mortgage on time would have the mortgage paid off and have only their Prop 13 protected taxes and home owners insurance for monthly housing expenses.  Further, using Bridges’ math of investing the difference between the lower cost of home ownership versus the higher cost to rent the past two decades or more, the home owner would have invested into a stock market that climbed and returned on the investment.

Over thirty percent of homes are free and clear.  Owned by families who went against Bridges’ theory of investing in stocks rather than buying and paying off a home to raise their families in and to have free and clear for their retirement.  Not being subject to landlords raising rent or requiring them to relocate through retirement, these families have the intangibles of memories, feeling of a family home and pride that does not come from a lifetime of renting and owning stocks. 

Kids are expensive too, would Bridges suggest my wife and I invest the money we spent on diapers, shoes, violin lessons, camp, airfare for family vacations and eventually money for college instead of having children?  Sounds absurd, but in a way in arguing against a family purchasing a home just because of financial conditions is similar to arguing to not have children for the same reason.

A big part of the housing bubble was created by too many people thinking a Bridges does, that houses are investments and not homes.  When that investment did not pan out the bubble burst when the investment was no longer making money and became just a house and not a home.

Is a home a lousy investment?  One can always pick and choose the math and investments to make such a case.  But is a home an investment or is it the center of your family, the shelter that holds stockings at Christmas, birthday parties, neighbors who watched your kids while you took your dog to the vet, a reception following the passing of a grandparent, a brunch celebrating the birth of your nephew.  A home is not an investment, it is a home and the memories and feelings it brings cannot be valued. 

Maybe the next housing cycle will be built by families buying homes for their families.  For those not interested in the intangibles and more conservative return on investment traditional home ownership brings, buy stock and rent.  Home ownership is not for everyone, but for many it is still a priceless investment that transcends monetary value.

If you would like to become a home owner please contact me to discuss how.

Have a question for me?  Ask me!

This week’s blog postings:

Note that I have created a new YouTube channel where I will post my mortgage video-blogs. You can check in whenever you like to see past blogs, or subscribe and be notified when I update the channel with a new posting.  I am trying to keep the videos from two to five minutes, informative and hopefully entertaining and educational. The channel is www.youtube.com/stratisfinancial

Merry Monday, Not For Stocks and Bonds: Stocks and bonds were hammered on Monday, a two minute look at why.

In the News  A link to two media sites that picked up last week’s question of the week on the pending drop in maximum mortgage amounts.  The Orange County Register’s Marilyn Kalfus picking up the question of the week and Don Jergler from the Daily Pilot writing a column on the loan reduction and using me as a reference/source.

Existing Home Sales Drop Again  A look at the important information in the National Association of Realtors monthly report on sales of existing homes.

I spent much of the week at Flagstar Bank in Troy, Michigan outside of Detroit in meetings with senior executives, underwriting managers and other mortgage professionals from across the country.  The purpose of the meetings was to give us a chance to communicate with Flagstar what they are doing well and what they can improve to increase our ability to deliver quality service and mortgage products to our clients.  The meetings were very productive and over the next week or so I will be sharing some of the information I received.  Of great interest was our call with Fannie Mae’s Chief Economist.

While I was away Mortgage Backed Securities continued to move sideways with some days seeing very large movements up or down, or sometimes both the same day.  Economic news this week should have moved rates down further, but the talks in Washington still failing to reach an agreement on how much money to borrow in the future has kept investors holding back from major bond investments.

Rates for Friday July 22, 2011: Big bump in rates on Monday, big drop on Tuesday and floating sideways the rest of the week.  Three weeks in a row with rates pretty much unchanged.  This creates volatile situation to see which way rates break when Republicans and Democrats in Washington finally reach an agreement on the debt ceiling.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.375%             Flat

30 year high-balance conforming           4.50%               Flat

30 year FHA                                         4.152%             Up 0.014%

30 year FHA jumbo                              4.210%             Up 0.004%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

I enjoyed being in the upper Midwest for several days to experience the different pace, different geography and different weather (over 100 degrees every day).  We tend to forget sometimes from our beautiful Southern California that other Americans in other parts of the country have their own struggles and challenges, and their own beauty and environments. 

Listening to fellow mortgage professionals from Oregon, Chicago, Louisiana, Texas, Florida, New York and other areas it was apparent that across the country the challenges that have been created by the regulatory zealotry in Washington has impacted mortgage applicants and home owners from sea to shining sea.  Even the Fannie Mae Vice President commiserated with us and indicated that until the regulators stop making changes the mortgage industry will be a challenge; and with the challenges for home mortgage applicants to get their loans approved.

Glad to be back home and enjoy the weekend with the family before we send the girls to camp in Minnesota for two weeks.

Have a great weekend; call me if I can be of assistance.

Dennis