Jun 22

Housing as an investment: The real money pit

I don't know about you, but I'm pretty tired of people talking about homes as an investment.

First of all, it was that whole notion of homes as an investment that helped bring our economy down. Remember? People were talking so much about how strong the housing market was — boooyah! — that it built up pressure for everyone to buy a house, even if they couldn't really afford it. Then, some sleazy investors took advantage of that whole thing — kind of like the sleazy Enron folks taking advantage of California — and then our economy went right down the proverbial crapper.

Even now you'll hear reports about how home prices are down, which, according to bow-tie-wearing economists, means that the economy is circling the drain faster and faster.

But, you know what? That really sucks. Because the inference, then, is that if home prices are affordable, that's a terrible thing.

Or, put another way: If regular people can buy a home, something must be wrong.

Remember when home prices were absurdly high here in San Luis Obispo County? I mean, they're still pretty absurd now. But a few years ago, it was off the hook. And it was always reported as if that was a good thing. A sign of a robust local economy.

Realtors were bringing in big bucks, spending money on ads and commercials, buying nice new SUVs and billboards showing them in corny golf shirts. Builders were making huge profits too, so that they could own homes like the ones they were building. And proud new owners were buying garden tools and door knobs every weekend at Home Depot.

Except there was a problem: Regular people couldn't possibly afford to buy a house here.

To buy a $600,000 home in a county where the median household income was barely $40,000 was simply impossible for most workers — the ones who drove that economy daily. But we were supposed to act like it was a good thing that the cost of homes skyrocketed even when salaries remained stagnant.

In fact, while salaries haven't increased nationwide since 1988, the average price of a new home in America has gone up $134,000, making it harder and harder for the middle class to have that American Dream of home ownership.

What I want to know is who transformed the American Dream into a 401(k) plan? Remember the old days when it was cool just to work and save so that one day you could own your own house that you would create years of memories in — and paint a horrific shade of green without a landlord pitching a fit? When did that become: We gotta buy a house because it's a good investment?

And, really, is a house that good of an investment?

If you bought a house in San Luis Obispo in the mid-90s, then, sure. Big time investment. You could have bought a house for $160,000 and sold it ten years later for $600,000.

Better than most stocks, I'd wager.

But San Luis Obispo was an abberation. In most places in the country, housing didn't explode like it did on the coast of California. In fact, my mom tried to sell her place in Indiana when the housing market was hot, and she couldn't find anyone willing to pay $70,000 for a 3-bedroom place in a nice, safe neighborhood.

Now I'm not an economist. And my math skills are usually limited to figuring out baseball player averages. But let's consider housing as an investment a little closer.

Let's assume you bought a house, say, when my mom did, in 1983. Back then the median home in America was $75,300. And let's say you stayed in that home ten years before selling it at the new median price, $130,000.

That means you sold the house for $54,700 more than you paid for it.

Pretty good for ten years.

Of course, your loan — in those pre-Freddie Mac/Fannie Mae days — probably had an interest rate around 4.5 percent. And, of course, you had to pay probably around one percent a year in property taxes. So go ahead and take around $14,000 off of that, leaving a still-healthy 40 grand.

Of course, since you own the home, that means you're in charge of all the home improvement stuff, faulty plumbing, broken ovens and so forth. But I'm going to be conservative here and estimate that you paid an average of $1,500 a year for that stuff. Which means that 40 grand just became 25.

So you've made 25 grand on that home — $2,500 a year. Not bad, except — shoot. I forgot home owner insurance.

I sure hope you don't live in a flood zone.

So maybe you bring in closer to $20,000. Still not bad, but nowhere near what those fat cats were making when they screwed our entire country while encouraging us to invest in housing.

And then there's another problem: Now you're out of a home. And to get another one, well, remember how the housing prices went up?

Good thing you have that 20K for a down payment.

So you see — housing as an investment isn't really a good idea. And yet our economy has seemed to live and die on that concept. (For another good story on this point, read this NY Times piece.)

As a nation, we fell for the American Dream and then fell into a giant money pit.

Tribune photo: Jayson Mellom

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