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Myths About Homeownership

Monday, March 3rd, 2008
Posted in Education by Joel Gross

American society and culture has encouraged several major myths on homeownership to flourish. Below, I will debunkforeclosed-home.gif these home owner myths as best I can.

Myth: Home values always rise.
Truth: Home values reflect the laws of supply and demand.

Over the last fifteen to twenty years, many people (mostly real estate agents and loan officers trying to make a buck) have trumpeted the idea that home values will always rise. They claim that since more people are coming into the world and that because over the last couple of decades home values have risen, that home values will always continue to rise. Anyone with a knowledge of basic economics should be able to debunk this, but for some reason even highly intelligent people repeat this claim.

Homes are not some magical investment vehicle, they are simply another asset just like stock, bonds, cars, etc. Stocks, as an aggregate over time, tend to go up in value as do homes. However, there have been many situations whereman-in-foreclosure.gif individual stocks and even the whole index have lost much of their value and stagnated for long periods of time. It’s easier to observe fluctuations in the value of stocks than it is to watch the prices of homes decline. For instance, even though the market for homes has greatly decreased recently, the actual sales prices of houses have not gone done that much. Why? Because people have their emotions and pride tied into their home and if they cannot get their asking price, they tend not to sell. Which is why right now home sales are at their nine year low and will continue to decrease until mortgage foreclosures by banks force them back up.

Myth: Homeownership is good for individuals, the country and the economy.
Truth: Government sponsored and encouraged homeownership is BAD for the economy and for people.

During recent history, people have been encouraged to purchase a home by federal, state and local governments as wellnationwide-foreclosures.gif as by overzealous lenders and real estate agents. Many people who make $80,000 a year were allowed to borrow $400,000 to purchase a home. However, these people simply could not afford it. No lender would ever give this borrower $400k to speculate in the stock market, so why did they give them $400k to speculate on real estate? Because the government backed many mortgages since homeownership is considered to be a benefit to society. But is it really?

Homeownership has really hurt this individual who purchased the home. His $400k house is now only worth $250k and he has only paid off $50k. This means our example has lost $100k that he didn’t have and since interest rates have gone up, he can’t pay his mortgage and is forced out by his bank. He now has to rent again, only now he has an extra $100,000 in debt. He is now in a depressing pit and it will take tons of time and effort to work his way back out.

Government encouraged homeownership has also hurt America. Over fifteen million American households are now locked into the situation described above, desperately scrambling to keep their heads above water. Studies have shown that the number one killer of marriages is financial problems and these mortage and homeownership issues are causing insurmountable financial problems for many people. Side effects likely will eventually include elevated crime rates, lowered productivity and lower morale as desperation and anger and depression set into the poor fifteen million households facing crushing debt.shark-foreclosure.gif

Sponsored homeownership also hurts the economy. When people own a home, they are locked into a community and it is difficult for them to leave. This means that they will take lower paying jobs and will not move to areas where labor is strongly needed. Homeowners cannot easily leave to go help fill the need in growing areas and these growing areas in turn will be stunted in their ability to grow further. A major study by British economist Andrew Oswold on developed economies between the years of 1960 and 1996 found a direct correlation between increased homeownership and increased unemployment rates (at a ratio of every 10% increase in homeownership a corresponding 2% increase in unemployment).

Myth: Owning a home is always better than renting.
Truth: You need to consider your individual position to make the best decision.

Owning a home can be a good investment, but you must thoughtfully consider the position you are currently in. Homeownership has many risks and rewards. Some factors to consider are the current unemployment rate in your area, how long you will probably be at your current job, the current prices of homes in your area and nationwide and their trends, the probability that you could get a better job in another area, your age, your ability to fix costly potential problems in your home, your knowledge of homes and home repair, etc.

Basically, I am not trying to say you should NEVER own a home, but that before you make such a giant leap you understand all of the problems and pitfalls and also realize that you could lose a LOT of money. A home is not a guaranteed investment vehicle and for many people (including myself and my brothers at this point) it would be a very, very bad decision to buy a home in the near future.

3 thoughts on “Myths About Homeownership

  1. Joel I agree with your article. The biggest mistake people make is that they see a home as a “real asset”. However is it really? A home is not a cash producing asset, it doesn’t increase your cash flow, rather diminish it i.e mortgage payments, maintenance costs, insurance etc. Unless you have more than one house and you rent it out to a price exceeding your mortgage payment on that house then it’s a real asset. The problem is that many homeowners cannot survive the down cycle and are forced to sell. To think that a house is always is a good investment is a wrong perspective, you need to look at it the right way. If you do your homework and buy low and sell high, just like stocks you can make a lot of money. The reason I believe it is better than stocks is because at the end of the day a house is a piece of land that you own and it’s just yours and it is something that can sit there for decades without any worries. Things like Land, Gold and Diamonds have been highly valuable for centuries and it is as true today as it was back then.

  2. God- All of the same factors must be considered when making a decision to buy a home. What is the current economic outlook? Is there a chance you could get a better job elsewhere? What is the cost of the property and of the house? How much debt will you need? Will real estate generally increase in value over the next couple years or decrease? Black Rooster- Thanks for the great comment. A home is an asset like any other and you must honestly consider all forms of revenue as well as all possible expenses and the risks to the home. It’s a simple decision if you have accurate information. Homes are just like stocks- if you do good research and have a rock solid understanding of the situation they can be a great investment. Don’t just buy based on what the government tells you though. And for you ladies- don’t buy a house based on how ‘cute’ it is and assume it is an investment. You need to approach it like you are purchasing any other revenue generating property, unless you want to think of your home as an expense (which is fine if you have the $$$).

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