After being forced out of my home on the Hudson River by Hurricane Sandy and finding myself in a rental apartment I've been rolling around the question, "Is owning a home really a good investment?" Robert Shiller, a Yale professor and co-founder of the Case-Shiller Home Price Index, is famous for making provocative comments on house prices. He recently delared on a Bloomberg TV interview that home ownership was "a fad...that took hold in the early 2000's."
Home ownership, in my view, was never a fad, even in the go-go days of the early 2000's. My parents whole heartedly embraced home ownership as both a dream and an investment. They owned our home and we lived in it for 27 years. They both worked, paid it off early, lived in it for years without mortgage or rent payments, and sold it at a profit of 460%. I think even Mr. Shiller could appreciate an investment like that.
There are several reasons I see for owning a home as an investment, probably the biggest investment a person can make. Owning replaces an expense, rent. Renting offers no potential for a return on your investment. Some experts state that over the last thirty years, renting has been cheaper than owning, and that if you invested the difference between your rent and your mortgage payment you'd be better off financially. The problem with that argument is that this isn't thirty years ago. In today's market, renting is MORE expensive than owning. And the reality is, very few people actually would invest that extra money if they had it.
The other big advantage to home ownership is its tax implications. Cashing in $250,000 in profits on Microsoft stock carries with it a substantial cost in capital gains taxes. Selling a home, while not as liquid, is excluded from capital gains taxes up to the $250,000 limit. If you and another person owned the home jointly but filed separate returns, each could exclude up to $250,000 in capital gains.
But here's the wrinkle I've been thinking about, now that I'm a lot closer to retiring age than I am to voting age. I think it makes sense to own the home that's where your heart is, and rent the home near where you work. In other words, buy where you would likely retire. Use it as a vacation home, a summer place, or rent it out for added income. In today's economy, where fifty is the new unemployed and where today's employee could be transferred or, worse, looking for work tomorrow, investing in a second home as a "retirement" place seems like a good idea if you can swing it. It carries all the benefits of owning a home, and will always be there as a fallback when you need it.
What do you think? Is home ownership overrated? Remember, you can't live in your IRA. Owning a home as an investment makes financial sense for many Americans today.
Originally posted at To own or not to own; that is the question