NAR Letter to the Editor: WSJ Op-Ed Ignores Important Facts About Owning

NATIONAL ASSOCIATION OF REALTORS®’ Chief Economist Lawrence Yun sent the following response to the Letters editor of The Wall Street Journal in reaction to a July 11, 2011 article, “A Home Is a Lousy Investment.”

July 13, 2011

Dear Sir:

The author ignores some important facts in arguing against the financial benefits of owning a home (“A Home is a Lousy Investment,” July 11, 2011). First, most home buyers do not pay cash for a home, but instead take out a mortgage along with a down payment. Following the author’s example, a home buyer in California who purchased a median priced single-family home in 1980 ($99,550) with a 20 percent down payment ($19,910) would see that investment grow to $296,820 when the home was fully paid off in 2010. Investing the same $19,910 in the Dow-Jones Industrial Index in 1980 would result in a balance of just over $238,000 in 2010 and be subject to taxes on the investment gains along the way.

Second, during the 30-year period while the homeowner is whittling down their mortgage balance and banking home equity, the renter has been paying rent that has increased by an average of 3.7 percent per year even as the monthly principal and interest payments on a 30-year fixed rate mortgage remain level. Based on rental trends, it is not too difficult to come up with reasonable scenarios where the investor who rents a home will pay significantly more in rent than the homeowner will pay in mortgage interest over the span of the 30-year mortgage. That’s because rent payments for a comparable home could easily exceed the principal and interest payment on a 30-year fixed rate mortgage in as few as seven or more years. In the end, the homeowner will have a free and clear asset while the renter will continue to pay rent.

Third, many homeowners also are able to take advantage of deductions for mortgage interest and property taxes when filing their federal income tax return making the cost of ownership even more favorable compared with renting. Furthermore, a capital gains deduction of up to $500,000 ($250,000 for single homeowners) applies when the home is sold.

Fourth, homeownership builds wealth. According to the Federal Reserve’s 2009 Survey of Consumer Finances, the median net worth of the typical homeowner exceeds $190,000 but is less than $4,000 for the typical renter. Given this difference, it’s hard to see how long-term renting is a strategy for financial stability and independence.

And, finally, people who buy homes well within their budget are long term planners. Research suggests that people who are long term thinkers and willing to forego short term gratification do well in many dimensions of life-wellness measures. That is why homeownership meets long term objectives and provides great incentives for people to work hard and lay the foundation for a stable and successful country.

Lawrence Yun
Washington, D.C.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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  1. Robert Sloat

    I’m trying to understand how anyone who truly understands real estate as a wealth building vehicle could ever suggest that real estate is a lousy investment. From the position that Robert Bridges holds as a professor of finance at USC, he should know better. Real estate has multiple benefits of which Bridges limits to one (appreciation) in his comparison. The economist from the NAR, Lawrence Yun politely refuted Bridges argument, but I’m not getting the feeling that people really grasp the power of his argument. The fact that I can use ‘leverage’ in an escalating market is one of the most powerful ways to build wealth there is. So if the average home in California only averaged 3.6% appreciation per year, that means that if I bought with an FHA loan with only 3% down, then I’m getting over 100% Return on Investment (ROI) every year. Show me a stock that gets that type of return. As a Real Estate Investment Advisor and Coach, I am teaching this principle every week to the people I work with. Even if i’m buying a home as an investment and renting it out, there are numerous markets where the ability to leverage can pocket me over 20% annual ROI. What really confuses me, is “what is Robert Bridges really trying to convince people to do?” Rent and invest in the stock market? I did that in my younger days just outside of college. I lost my shirt in the stock market as have most people in this last sub-prime lending fiasco. In contrast, I’ve made a ton of money in real estate. If the WSJ is trying to convince people to not buy homes and instead have people buy stocks, then I start to question the integrity of this newspaper. Shame on those boys.

  2. Russ Wetherill

    And I’m trying to understand how someone who claims to be a Real Estate Investment Advisor and Coach can be so bad at math. You don’t get 100% return on 3% down with 3.6% appreciation unless you ignore recurring expenses like a mortgage payment, mortgage insurance, taxes, insurance, maintenance, mello roos, HOA fees, etc.; and, non-recurring expenses like closing costs, move-in, furnishing, repairs and upgrades, etc.

    For many condos in Orange County, you can expect to pay 8% of the purchase price every year to realize your 3.6% appreciation. In for a penny, in for a pound. On a $300k condo, the 3% down payment is just $9k, but the closing costs are another $6k (2%). Furnishing and move-in will set you back at least another $9k(3%) by the time you paint, replace flooring, light fixtures, appliances, drapes or blinds, and fix the things the seller refused after the inspection. FHA upfront fees of $3k (1%).

    Non-recurring expense 27k (9%) of purchase price.

    For recurring expenses:
    The annual taxes will be ~ 0.0125*300k = $3.75k(1.25%)
    The annual mortgage interest will be ~ $13k (4.5%)
    The annual HOA will be $3.6k (300/mo. or 1.2%)
    Mello roos is typically .007*purchase price when new = .007*450k (built in 2005). = $3k (1%)
    Maintenance is .005*300k=$1.5k/yr(0.5%)
    FHA mortgage insurance = .0115*291k=3.3k/y(1.15%)
    Tax savings = 1.2k/yr (0.4%)

    Recurring expenses ~ 27.6k (9.2%)

    So the 3% down is actually a 9% out-of-pocket loss, compounded by a 9.2% annual carrying cost. This is a net annual loss of 5.6%, assuming a 3.6% appreciation rate. And, if the house price is increasing, so are the HOA and the maintenance costs as well.

    Of course there are some benefits, like being able to live there. But, that is only a financial benefit when balanced against comparable rental properties.