Lammy
Registered Abuser
dwayne said:This article is US-centric but very interesting
Forget what your friends say. Owning a home is hardly the best way to save for retirement. How do we know? We ran the numbers.
MOST PEOPLE THINK of their home as a blue-chip growth investment — especially in times like these, after the stock market has come through a long decline.
The truth is, it's more like the most expensive mutual fund you can imagine: Not only does it have a front load consisting of closing costs, moving expenses and other charges, but it exacts high management expenses each year, in the form of maintenance and property taxes. Then, on top of all that, most people get charged a 6% back-end load for the broker's fee when they sell.
Do the benefits of leverage and tax breaks outweigh the "loads"? Sometimes. But not by as much as you'd think. For most of us, building wealth with our residence is a slow and inefficient process — if it works at all. It's especially hard in this era of low inflation simply because the underlying asset, your home, typically doesn't appreciate very quickly. Compared with average share prices or even bond returns, house prices plod upward at a very slow rate: since 1979, about 4.4% a year. If you can't do better than that in the stock market, you need to fire your broker.
Real estate enthusiasts will point out, correctly, that you can leverage your purchase of a home — that is, realize a profit on the total value of a house with only a small down payment. When you combine that with incredibly generous tax breaks, an inherently tepid asset becomes a better wealth-building tool. But there are other costs that offset those advantages. For one thing, the house you live in has a much higher carrying cost than your other investments. Not only do you pay mortgage interest and insurance premiums, but you often get hammered with significant property taxes. And don't forget maintenance. That's easy to ignore — especially in years when you don't have to paint, fix the roof or replace the boiler. These add up, especially over the long term.
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The right way to treat your house is as an expense — one that, if you're lucky, will pay you a rebate when you're done with it.
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In order to quantify just how good an investment the typical house is, we built a model that takes each payment you make on your house and calculates what would have happened if you had instead invested that payment in a hypothetical investment that returns a fixed rate each year and is subject to the 20% capital gains tax.
The average American home has appreciated somewhere between 3 and 6% a year during the past 20 years, depending on which time period you look at. Let's say you buy a house for $250,000 and get the high end of that range: 6%. That means you will be able to sell it for almost $376,000 after seven years, the average time active buyers and sellers own their homes, according to the National Association of Realtors. Nice gain, right?
But what did it cost you? Let's say you put down 20% to avoid having to buy mortgage insurance. You should expect to pay $800 to $1,000 or 2% of the house's value, whichever is higher, in closing costs. Let's say you get lucky and end up paying only 1.5%. Assuming you're equally lucky and pay slightly less than the averages across the board, you'll end up with a 7% mortgage, property taxes of about 1.5%, annual repair costs of about 1% of the purchase price, tax and repair inflation that rises slower than the overall consumer price index, 1% initial furnishing expenses and annual insurance premiums of about 0.3% — and your income-tax break will be figured at a 32% combined federal and state rate.
After selling the house, you'd have to fork over $22,554 to the broker and $182,295 to satisfy the outstanding mortgage principal, leaving you with $171,058. Your total payments over the seven years would have amounted to $167,011 (including the tax givebacks), leaving you with $4,047 to add to your wealth — the equivalent of a 1.1% annual return. If you hold the house for 12 years — the NAR's best guess at the average homeownership period for the whole population — your selling price would rise to $503,049. Your share of that goes up to $309,702 because you have less mortgage principal to pay back. Of course, your total payments rise as well, to $249,247, but the final proceeds of $60,456 represent the equivalent of a taxable investment with a 3.7% annualized gain. Let's say the house appreciation rate drops, to 4.5%. Now the proceeds fall short of your total 12 years of expenses by $13,878. For seven years of ownership, you would find yourself out $29,503.
Hot markets perform better, right? Surely you can do better in the San Francisco Bay Area, San Diego or Westchester County, N.Y.? In fact, if you have a very high appreciation rate, the leveraging advantage really does kick in. Take the same $250,000 house with 9.2% annual appreciation — the highest rate for a major metro area over the past 10 years. In that case, your equivalent annualized return rate would be 11.2%. Not bad. Of course, you can't make the case for investing your retirement savings in a house by cherry-picking only the best markets for proof. For one thing, most of us don't have the option of living in the hot markets. For another, they seldom stay hot for more than a decade at a time. The tech wreck is already killing housing prices in the Bay Area.
The fact is, when it comes to outsize returns, equities win walking away. In one of the worst 12 months in recent Wall Street history, 16 of the 80 stock sectors we track here at SmartMoney still had gains of 30% or more.
Once you stop looking at your house as an investment, it's easy to see the real advantages of homeowning. Take the case cited above, where you are out $29,503 for living in a house seven years. Could you have rented the same living space for what amounts to a little more than $350 a month? We doubt it.
In other words, you should treat your house as an expense — one that, if you're lucky, will pay you a rebate when you're done with it. That's what it really is. A home is your "best investment" only metaphorically — if it helps you achieve a more comfortable life. If you do it right, your house purchase will free up much more of your income — now and in the future — to fund some truly outstanding investments.
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Can someone give me the gist. I can't be f***ing arsed to read all THAT!
