.Housing Fades as a Means to Build Wealth, Analysts Say

[Bienes Raices]

http://www.nytimes.com/2010/08/23/business/economy/23decline.html?hp

It seems like they might be jumping the gun a bit. Yesterday they had an article that small time investors are leaving the stock market. But people will have to put their money somewhere.

[Jon Holdman]

I believe "housing as a means to wealth" is patent BS. Forced savings, yes. Wealth, no.

Note that I do not mean real estate (or stocks or any other sort of) investing. I do mean "owning a home". I especially mean that total BS of "starter homes", "move up homes" and "trophy homes". "Property ladder" and similar gibberish.

All these ideas are promoted by people who have a vested interest in real estate transactions. NAR, NAHB, agents, developers, builders, and contractors. And, yes, real estate investors. They're actually not unlike stock brokerages. Transactions generate income. There's an old saying for stock brokers: "The firm made money. The broker made money. Well, two out of three isn't bad."

Yes, lots of people managed to buy a house at the right time (roughtly pre-2000). A few managed to sell at the height of the bubble and pocketed big bucks. Other people had a huge paper net worth. Some just watched it rise and fall. Others "spent their house" with cash out refis and HELOCs. They may have felt rich, but they were just riding the bubble. Some of those who "sold early" are now crying in their beer that they need relief from their upside down loans. And there are plenty of people who went into the situation with good intentions and just bought at the top of the market and are now caught in a squeeze. If those people stick it out and continue paying on their big loans they may never see even a sliver of retirement, let alone wealth.

Most of the "wealth" associated with a primary residence comes from a) a long time horizon, and 2) ignoring most of the costs. Bill Bronchick is fond of saying "don't you wish you could buy your parents house for what they paid?" Sure, is of course the answer. But I'd pretty much like to buy any asset that currently has value for the price it was selling for 50 years ago. The real value to real estate is that people typically own it for a long time (at least they did pre "property ladder") and if they don't make the payments they get the boot. But if they do make the payments and stay put for 30 years they now own a significant asset. Even if they've never saved a dime, and the house only appreciates at 3% per year, the $100K house they buy today is worth $240K. If that's all you have, that's quite significant. Looks like a $140K profit.

OTOH, even at today's low rates, a good borrower might be paying 4% on a 90% LTV loan. They put in $10K (really, more like $13K with costs) and make payments if $430 a month for a total of $155K. Plus the $13K in at the start. Oops, profit is only $72K. Further, they're paying taxes and insurance, at the very least. Figuring that at, say, $100 a month (PITI=$530). Over the 30 years that's another $36K. Profit's down to $36K. But try to sell that $240K house in the best of times and you'll pay $19K in commissions and costs. You're left with the princely profit of $17K.

The first house I bought was in 1987 and we were paying 9% on a 15 year owner financed note. We thought we had a great deal. (And, yes, the Mrs has reminded me more than once that house would have been paid for seven years ago.) The total of the payments for that 15 year note would be $163K. At 30 years, its $261K, leaving you in the hole even without the additional costs. For what its worth we paid all of $55K for that house (2400 sq.ft., but such a screwy floor plan counting bedrooms was an exercise in futility.) According to zillow (FWIW) its currently worth $148K. If that's true, that's roughly 4.5% appreciation over the last 23 years. Actually, I know it was worth only $65K in 1995 since that's what we sold it for. So, that's more like 6% since then, but almost nothing during the time we owned it. We did even worse for the house we bought in Bakersfield in 1995 then sold for a loss in 1999.

But wait there's more. Or less, as the case may be. If that house has been unmaintained and un-updated for 30 years, is it still worth $240K? If you walked into a house that hadn't been updated or maintained since 1980, what would you think? 30 year old HVAC. 30 year old roof. 30 year old kitchen, baths and plumbing. $17K is just over $500 a year. I'm thinking that, and more, gets spent on maintenance.

The real value to owning a home, IMHO, is that if you just stay put for the 30 years, or roll the value from one home to another and pay all the exorbitant transaction costs out of pocket, you have a place to live. If you're retired and living on a fixed income, even a $530 a month payment might be significant. The maintenance doesn't go away, either. OTOH, if you own your house free and clear you at least have a roof over your head.

A primary residence is an expensive doo-dad. Having expensive doo-dads is wonderful, assuming you can afford them. Having a "free" roof over your head when you income is limited is beyond wonderful. Expensive doodads, including residences, being a path to wealth is a myth.