With a Weak U.S. Housing Market, Is Home Ownership Still a Good Investment?

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Owning a home has long been a goal for many Americans, but now more people consider U.S. homeownership a poor investment choice and are kissing that plan goodbye.

Since the housing market collapsed in 2008, forcing millions of underwater homeowners out of their houses, real estate has become a scary and unreliable investment option.

"The emotional scars left by the collapse are changing the American psyche," Pete Flint, chief executive of real estate Website Trulia.com, told The New York Times. "There was a time when owning a home was a symbol you had made it. Now it's OK not to own."

The rate of U.S. homeownership is down to 66.4%, the lowest since 1998, according to the U.S. Census Bureau. Some experts say it could fall to the level of the 1980s, or earlier.

U.S. home prices keep sliding as many Americans decide owning a home is not for them. Prices this week fell to their lowest level since 2002, according to the Standard & Poor's Case-Shiller Home Price Index, erasing some of the gains made since the record low reached in 2009's first quarter. Prices are down 33.1% from their July 2006 peak.

Some see falling prices as a great opportunity to take advantage of the troubled market and buy a house. But many would-be buyers are leery of investing in houses that are unlikely to appreciate any time soon. The number of Americans who think buying a home is a safe investment has fallen to about 66% from 83% in 2003, according to a national survey by Fannie Mae released May 11.

Instead, many choose to rent.

"They're renting and they're happy renting because they're scared," Douglas C. Yeardley Jr., chief executive officer of luxury homebuilder Toll Brothers Inc. (NYSE: TOL), told The Times.

Even though many Americans can afford to buy homes at the current near-record lows, they prefer the benefits of renting to the commitment of owning a home. Renters have the flexibility of not being tied to a certain location, should they have to move to find work or a more affordable place to live.

"We have more of what we call ‘renters by choice' than I've seen in the 40 years I've been in the apartment business," Jeffrey I. Friedman, chief executive of Associated Estates Realty Corp. (NYSE: AEC), told The Times.

Renters pay less each month than if they had a mortgage, and use the extra money for savings and other investments that offer better returns than buying a house.

"For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership," Jordan Rappaport, senior economist at the Federal Reserve Bank of Kansas City, told The Times. Rappaport found in a recent study that homeownership only half the time builds more wealth than other investing techniques.

But some housing industry members remain hopeful the goal of owning a home is not dead, just on hold.

"Most people still want the big house with the big lot in the desirable school district in the suburbs," said Toll Brothers' Yeardley. "No one ever renovated the kitchen or redid a room for the kids in a rental. I think – I hope – we'll be O.K."

This brings us to next week's Money Morning "Question of the Week": With the weak state of the U.S. housing market, do you recommend owning a home? Or do you favor renting? How important is it to you to be homeowner one day? How has the U.S. housing market and home prices affected your home-owning decisions? Have you been helped or hurt by low prices? When do you see prices recovering?

[Editor's Note: Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at mailbag@moneymappress.com. Make sure to reference "Question of the Week suggestion" in the subject line.

We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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  1. Professor K | June 1, 2011

    The real estate market has a long way to fall before people will buy. Nobody in their right mind would buy a home now with the market only halfway down the toilet.

  2. Mary | June 1, 2011

    I think it depends on your stage in life, and where you live. I would reccomend owning, if you plan to live in your home forever. I don't view ownership as an investment. I think that mindset is what brought about the housing collapse, as the banks encouraged unqualified buyers to 'own' a home.
    At the present time, I own several properties, including rental homes. I have NO mortgages on these properties, and they bring in a modest income after taxes, insurance and maintenance. It is not for the faint of heart, and is not always easy to deal with tenants. I would actually like to sell one of these properties, but the market is too low.

  3. James Kederis | June 3, 2011

    Forward to others

  4. Tom Rostkowski | June 8, 2011

    I still own a house and I am currently trying to sell it so I can move out of NJ. My wife and I have an offer in on a NY State house but can't buy it without selling the NJ house. The only way we can buy it now is if the seller(who currently rents the house) holds the mortgage until we sell. You will have to see more of this if people want to sell their homes!!!!!

  5. Tom Winkel | June 9, 2011

    I own my home in a 55+ community and also own three rental properties that are free & clear.
    The rentals provide me with most of my retirement income. My fist rental was purchased as a home for my family, when we wanted to move to another city we could not accept selling at the loss that the market dictated(1983 West Texas ). We rented it instead, we now have the second renters in the house and they have been there for 24 years! They could have easily paid for the home. People have to live somewhere and someone has to own the property that they are renting. It seems that this will push up the rental costs?

  6. Barry Fitzgerald | June 15, 2011

    While it may make sense to rent and invest the savings, how many renters actually take the money they save and put it into investments? Not many I would guess.

  7. Gordan Finch | June 17, 2011

    This property cycle is old hat, never in the long term has property lost value, do not believe the short term hype. Your home is your castle it will gain in value provided it is well constructed and maintained. Itsfraud by the institutional investment banks that created the downturn, hold on do not allow them to steal your castle, and you will be the winner. Renting is for the unfortunate who cannot win, and mugs who have a choice.

  8. Marc McGuire | June 17, 2011

    It solely depends on what your intention on why buy a house. You can look at renting without getting no gain from it, basically toileting your cash and have your freedom to move where you want. Don't forget you will have no control under someone elses hand that can call the shots and may be inconvient to you. In a lot of areas you can buy at the same rate as your renting and still have the option on doing what you want such as rent it out if you like to be elsewhere. No one has a crystal ball on the future outlook for this type of investment. This is going to be a work in progress for several years. Consider all the angles with pro's and con's on your situation. After all investment are risks. Otherwise you wouldn't be at this site.

  9. Deon Moore | June 22, 2011

    I recently turned 25 and purchased my first home in Washington D.C. It's not the largest place but it's my slice of heaven. My mortgage including property taxes is cheaper than a comparable place in this area and I take $200 extra a month and pay towards my principal. I also take $1,500 every time I receive a tax return and pay down on the principal. In doing so, I will have my house paid off in 15 years and will be 40 years of age with a free and clear property in the nation's capital.

    Yes renting is convenient, but if we are talking dollars you want to own. I also have money to invest in stocks, gold/silver, and other ventures, so the argument that renters are taking their money and putting it into other investments falls on death ears!!!

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