Is real estate “The Great Lie?”
Writing as author of “Diary of a Financier,” a blogger on The Buttonwood Tree provocatively argues that costs beyond mortgage payments suggest that real estate and housing are “not terrific investments.” Says the post:
Most suggestions otherwise are a huge lie, perhaps The Great Lie. The Lie is perpetrated most in the commercialization of the “American Dream”: a white, picket fence for every man, woman, and family. Non-income-producing, residential real estate is broadly a money pit. For long-term holding periods (5-20 years), the value of this real estate is severely eroded by its cost of carry, including Taxes + Insurance + Maintenance.
Although I have often expressed my own concerns about The American Dream, I have to wonder about the blogger’s analysis.
It is true that I possess nothing like the analytical background of a financier, but I do question some of the assumptions. Arguably, they distort the conclusions in the post. I’ll take them one by one:
- Albeit understandably for the writer’s purposes, the use of national averages (e.g. sale price of $297,700 with property tax of $1,180 annually) ignores the old chestnut that all real estate is local;
- Dependence on 2010 statistics is odd and may suggest to a cynic that they were chosen deliberately to skew the results;
- Relying on real — that is, inflation adjusted, not nominal — annual price growth variously of 1 percent and 2 percent may or may not understate appreciation that economists are forecasting, though no one is making credible predictions over the 38 years that the “Diary” models;
- The bursting bubble indisputedly crushed home values, but price increases between 1980 and 2006 positively created wealth.
The diarist suggests that there is no reason to expect the next 30 years will mimic that experience. “. . . [T]he aspiring investor needs only to ask himself: ‘Do I think demographics will shock the housing supply/demand balance, such that trend growth outruns a home’s cost of carry?'” the blogger advises readers.
I cannot dispute the merit of perhaps the writer’s largest point that “mortgage cost is merely the headline cost of home ownership.” In fact, I heartily agree with the following two sentences:
When you and your family buy a home, you’re not making an investment or crystallizing your wealth. What you are doing is pursuing an opportunity cost, building equity rather than paying rent into a black hole
Despite my reservations, the post is, as I said at the beginning, provocative. It is worth a look.
Having read about “The Great Lie,” you can provide your own assumptions in a terrific rent. vs. buy calculator that the New York Times has devised to contain virtually all associated costs.
Although there is no express way to account for inflation or opportunity costs, the comprehensive calculator — the best I’ve seen — certainly can help anyone trying to make an informed decision.
Tomorrow: Auction results
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