Home Truths: Why Property Is A Poor Investment

In a 2014 article, the WSJ advised readers not to buy a home as an investment. The article points out that after costs, buying a home doesn't typically yield much. It's better to think of it as a place to live. While the tax breaks are impressive, and homeownership forces us to save, the WSJ argues that there are other ways to build wealth and achieve financial security.

In a podcast episode from January 2024, WSJ reporters Bourree Lam and Julia Carpenter advise prospective homebuyers to ask themselves a few questions before starting their search. They highlight the importance of knowing your numbers, such as how much you can afford for a down payment and monthly mortgage payments. They also suggest considering the length of time you plan to stay in the house, as buying a home is a long-term commitment.

Another WSJ podcast episode from November 2023 discusses the challenges of buying a home in the current market. Amid elevated mortgage rates and low inventory, many prospective homebuyers have decided to spend their savings elsewhere, such as on vacations or renovations. The episode also highlights the increasing difficulty of getting on the property ladder for first-time buyers.

A more recent WSJ article from July 2024 supports this view, stating that it's now 52% more expensive to buy a home than to rent one due to climbing mortgage rates. The article concludes that there's never been a worse time to buy instead of rent.

The cost of buying a home versus renting one is at its most extreme since at least 1996

The Cost of Buying a Home vs Renting

The cost of buying a home versus renting one is at its most extreme since 1996, with the average monthly new mortgage payment a massive 52% higher than the average apartment rent. This is a far greater disparity than before the 2008 housing crash, when the premium peaked at 33% in Q2 2006.

The American Dream

Homeownership has long been considered a part of the American Dream, but with mortgage rates inching towards 8% and a limited number of homes available, this dream is becoming increasingly out of reach for many. Prospective homebuyers are facing a rude awakening, with some deciding to dip into their savings for a new home and spend it elsewhere.

The Math Doesn't Add Up

The simple fact is that the math doesn't work for many people. When comparing the cost of owning a home to renting, or the cost of taking out a new mortgage to trade up to a larger home, many are recognising that buying just isn't worth it right now.

Starter Homes

Those who bought starter homes when mortgage rates were lower are in a better position, as they at least own something. However, they may still feel trapped in a space that they never intended to be permanent.

The Future of Homeownership

With the cost of buying a home at an extreme high, the traditional milestone of homeownership is being pushed further and further out of reach for many, especially younger people. This is causing a shift in mindsets, with people having to "rejigger their definitions of success away from home-ownership as a pivotal milestone".

The Benefits of Renting

Renting offers flexibility and freedom, and can be a positive choice that fits people's financial lives better, especially if they are moving around frequently. Additionally, renters don't have to worry about the extra costs of maintenance and repairs that come with homeownership.

The Bottom Line

While buying a home can help build wealth and achieve financial security, it is important to consider all the costs involved, including upfront costs like the down payment and closing costs, as well as recurring costs such as HOA fees, maintenance, and insurance. With the current extreme disparity between the costs of buying and renting, it is crucial for prospective homebuyers to carefully evaluate their financial situation and make an informed decision.

There is a dearth of starter homes for first-time buyers

There is a severe shortage of starter homes for first-time buyers in the US. This is due to a combination of economic factors, including the massive government stimulus issued during the early stages of the pandemic, rock-bottom mortgage rates, and a shift in focus by builders towards more lucrative projects. The result has been one of the most dramatic home-buying frenzies in US history, with home prices reaching historic highs.

Starter homes are typically smaller, more affordable houses that serve as an entry point for first-time buyers or those on a tight budget. They are often condominiums or small houses with two or fewer bedrooms and fewer amenities, usually located in less desirable areas. Despite their drawbacks, starter homes are an attractive option for younger buyers as they are less expensive and don't require a large down payment. They also allow buyers to build equity over time and eventually trade up to a nicer or newer home.

However, the absence of these entry-level homes on the market has made it extremely difficult for first-time buyers to achieve homeownership. Data from the US Census Bureau shows that in November 2022, not a single newly-built home sold in the US was under $200,000. This indicates a stark disappearance of starter homes from the US real estate market. The situation is further exacerbated by the increasing construction of newer and more expensive homes, which now make up a higher share of the available housing inventory.

The lack of affordable housing options has led to a deepening housing crisis in the US, with Americans of all backgrounds grappling with housing affordability. Many first-time homebuyers, largely millennials and Gen Z buyers, have given up hope of ever owning a home. The high cost of homeownership, combined with rising mortgage rates and property taxes, has made it challenging for many would-be buyers to enter the market.

To address this issue, experts suggest that home prices in the United States need to decline to make room for the next generation of homebuyers. Additionally, there is a need for more starter homes or lower-priced options to provide opportunities for potential first-time buyers.

The average monthly new mortgage payment is 52% higher than the average apartment rent

The cost of buying a home versus renting one is at its most extreme level in decades, with the average monthly new mortgage payment being 52% higher than the average apartment rent. This is well above the pre-housing crash level of 33% in 2006. The last time the cost of buying versus renting was this disproportionate was in 1996, according to The Wall Street Journal.

This significant discrepancy is due to a combination of factors, including high-interest rates, low housing supply, and skyrocketing home prices. The increased cost of debt, as rates on a benchmark 30-year home loan reached 8%, has played a crucial role in this shift. Additionally, high home prices and mortgage rates have locked many first-time homebuyers out of the market.

In the past, monthly mortgage payments used to be the same or lower than rent payments on an apartment, as owners tend to invest more in their homes due to expenses like repairs and renovations. However, the current market conditions have made purchasing a home significantly more expensive than renting.

Despite the high-interest rates and increased costs, some experts argue that it might not necessarily be a bad time to purchase a home. Waiting for rates to drop may result in stiffer competition within the market. Additionally, there is never a "perfect time" to buy a house; it ultimately depends on individual circumstances and financial goals.

While buying a home may provide tax breaks and force disciplined savings, it may not always be the best investment strategy. It is essential to consider other investment options and not rely solely on homeownership as the primary savings plan.

The cost of a home is a long-term commitment

Firstly, it is crucial to recognize that the cost of a home extends beyond the purchase price. When considering buying a home, one must be prepared for various upfront and recurring expenses. Upfront costs include the down payment, closing costs, and various fees associated with the mortgage and inspection. Closing costs, which are paid when finalizing the purchase, can amount to around 5% of the total housing costs. Additionally, there are recurring costs to factor in, such as monthly HOA fees, maintenance fees, homeowners insurance, and emergency funds for unexpected repairs. These costs can quickly accumulate, and it is essential for buyers to be financially prepared.

Moreover, the decision to buy a home should be aligned with one's long-term plans and financial stability. A home purchase often involves committing to a fixed-rate 30-year mortgage, locking in the interest rate for the duration. This lengthy commitment should be carefully considered, as it can impact one's flexibility and financial planning. For those who anticipate moving within a few years, renting may be a more suitable option, as the costs of buying and selling a home within a short timeframe can be detrimental to one's financial situation.

The current housing market dynamics further emphasize the long-term nature of the home-buying commitment. With mortgage rates inching towards 8% and limited housing inventory, many prospective buyers are facing a rude awakening. The average monthly new mortgage payment is now 52% higher than the average apartment rent, making it the worst time to buy instead of rent since 1996. These factors have led some buyers to delay their home-buying plans, not just by months but by years.

In conclusion, the cost of a home indeed represents a long-term commitment. Prospective buyers should carefully evaluate their financial situation, long-term plans, and the current market conditions before making this significant decision. It is essential to recognize the various costs associated with homeownership and to ensure that one is comfortable with the level of commitment and financial burden involved.

There are many unseen costs to buying a home

One of the initial unseen costs is the home appraisal fee, which is required by lenders to assess the market value of the property. This typically costs around $300 to $400. Additionally, a home inspection is highly recommended to identify any major issues or concerns, which can save you money in the long run. Home inspections usually range from $300 to $500.

Another significant cost is the loan origination fee charged by mortgage lenders to set up the home loan. This fee is often based on a percentage of the total loan amount and can be quite substantial. For example, a 1% origination fee on a $500,000 mortgage would result in a $5,000 fee.

During the closing process, you will also be responsible for various closing costs, including closing or escrow fees, homeowners insurance for the first year, loan origination fees, property taxes, private mortgage insurance, and title search and insurance, among others. Closing costs can typically range from 3% to 5% of the mortgage amount.

Once you become a homeowner, there are ongoing and overlooked costs to consider. These include utility bills, such as heat, water, and phone services, which can be particularly surprising if you're moving from a smaller home or apartment. Additionally, you'll need to budget for home maintenance and repairs, as unexpected issues like leaky pipes or broken air conditioners can arise at any time.

Homeowner's insurance is another necessary expense, protecting you and your lender financially in the event of major repairs, injuries on your property, or theft. If your down payment is less than 20% of the home's purchase price, you'll also be required to pay private mortgage insurance (PMI) each month.

Lastly, homes located in planned communities often come with homeowners association fees, which cover the costs of landscaping, community repairs, and maintenance of amenities. These fees can range from $200 to $400 per month, depending on the community.

In conclusion, while buying a home can be a rewarding experience, it's crucial to be aware of the many unseen costs involved. From upfront expenses during the homebuying process to ongoing maintenance and insurance costs, these expenses can quickly add up and should be carefully considered when planning your budget as a new homeowner.

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