Housing is center stage in the news and around the water cooler again, with newspaper and magazine stories dissecting minute fluctuations in home prices and questioning if this is the right time to buy a home or whether Americans should ever own real estate again.
The experts and economists quoted in these pieces are smart thought leaders who do important work that impacts lots of people and places.
But don't listen to them.
If you are Ms. Smith in Heartland, USA trying to figure out whether to rent or buy, you shouldn't care what they think.
The thought process on homeownership has veered off track in post-crisis America. People overcomplicate the pros and cons, and try too hard to factor in things they hear on TV or read in news stories like "risk profile," "cost benefit" and "adjusted for inflation." "How much will your house be worth in 6 or 7 years, adjusted for inflation?" is a common refrain. (Answer: NO ONE knows).
Forget about all that and go back to the basics: Buy if you can responsibly afford it, if you will be in one place for a while and if you don't want anyone else to tell you can't paint the walls burnt orange.
That's it. That's the list.
Why should you care if the great economist Dr. Von Housing thinks the value of homes will be the same in 10 years, adjusted for inflation? Does that mean you should buy stocks instead and rent forever? How warm will 100 shares of Microsoft keep you at night? Can your kids play downstairs in your T-Bills? Is your first $250,000 to $500,000 of profit on that great stock tax free, like a home? Did you invest in stocks in 1999? How did that go 10 years later? (Answer: -10.83 percent in 2009, NOT adjusted for inflation.)
A house serves as an investment that diversifies your portfolio whether you intend it to or not. But so does your 401(k) and you don't over think that do you? Just sign up, pick some diversified funds and go live your life! You open that statement every quarter if the market is doing well or if the market is down, it "accidentally" slips into the recycle pile unopened.
And that's the whole point. It doesn't matter what the price will be in every quarter, adjusted for inflation. Your house doesn't magically get smaller if the value temporarily drops. If you are paying down the loan every month and trimming the hedges every so often so you don't get that stare from the neighbor, the homeownership formula works.
If rents and mortgage payments are running roughly the same, then it should be a lifestyle choice, as well as an economic one. If you need or want to hedge the risks associated with owning a home, go ahead and rent. Feel free to move every 12 to 24 months, find the newest building with the hottest amenities and go out to eat every night at the local watering hole downstairs.
But if your intention is to stay in a home for many years, the monthly payment on a fixed rate mortgage is paying interest that is lowering your taxes and paying principal each month. With each payment you are continuously building more equity so that you might have NO payment one day. Ask Dr. Von Housing what your rent payment will be vs. a fixed mortgage payment at these low rates in 10 years? What about in 30 years?
Adjusted for inflation, of course.