Mar 23, 2011

Should Young Adults buy a home Today?

There is a debate raging about the financial advantages and disadvantages of owning a home. Several financial 'experts' have done recent interviews about why home ownership is not a good investment. Professor Jack Francis, a former Federal Reserve economist, said in a recent CNBC article:
"For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”

He goes on to day that it “may become good advice 10 years from now, but right now it’s not.” And he tells his students that this is not the time to buy a home and advises them to rent instead. He bases his conclusions on a study he did looking at real estate from 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%.

There are several things wrong with this analogy. First, his study covers a 30 year period which does not include the last 3 years. Looking at the same statistics since January 2000, we find that home values went up 42% while the S&P lost 4.7%. It all depends on the data you choose to use.

Most of these comparisons claim that putting your money into a different investment vehicle other than real estate is wiser. What they don't take into consideration is that the investor will still have a housing expense. You still have to spend money on shelter. You can't just take your money for shelter and buy other assets with it. How do you live in your 401k or IRA?

The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and lock it in for 30 years. That may soon disappear as mortgage rates increase when the economy improves. Right now you can still lock in your housing expense for 30 years. Renting is like having an adjustable rate loan that readjusts every year. Which way do you think rents will go in the next 30 years?

Unlike rental payments that are gone as soon as you write the check, your mortgage payment is like money you put into your savings. While I don't think every American needs to be a homeowner, I believe that this is a great time to buy a home. And if someone graduating from college can afford to do it, they should. [where: 75230]

1 comment:

lisa said...

I think it is not the right time. They are too young for me.

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