Why Home Ownership May Not Be Wise

Friday, April 17, 2009

For decades, the common wisdom has been that's it good to own a home. Tax laws have been structured to encourage home buying. (Owners get tax deductions on their mortgage interest.) The net result was that by 2004 about 70 percent of Americans owned their own homes. But, there is such a thing as turning virtue into vice.

This strategy worked as long as sane people realized that while home ownership is good - it does not follow that home ownership is good for everybody. I've been screaming about lousy loans for five years. But, by the time we awoke from the orgy of rotten loans it was too late. At first, it was the adjustable rate mortgages (ARMs) that were in my crosshairs. These loans teased buyers with introductory rates that tempted prospects to buy more home than they could afford.

But, based on the theory that there's no such thing as to much of a good thing, lenders continued developing dumber and dumber products. Next came the "interest only" mortgage. By allowing people to pay only the interest for the first few years, American's bought bigger houses and hoped for the best - while never paying a dime of principle. Then came the cherry on the sundae of lousy mortgages: the "liar's loan." With these all caution was thrown to the wind, and lenders made loans to people without even verifying their incomes.

Finally mid-2008 rolls around and everyone is standing around looking dumb and stupid asking, "What happened?" Well, duh! The house of cards fell in on itself. The success of all of these dubious loan products was premised on one belief: housing prices would always go up. Econ 101 tells us that all investments (including real estate) are cyclical. The faster an investment goes up, the greater chance it has of going south in a New York minute!

So where does this leave us? Let me share three take-aways.

The primary reason for buying a home is to have somewhere to live. The investment potential should run a distant second.

If you are a first-time homebuyer with no debt and cash on hand, this might prove to be one of the best long-term buying opportunities in history. Both home prices and mortgage rates are down.

If you can't afford a home - don't buy one! The case against home ownership is strong. When maintenance and other costs are factored in, owning frequently costs more than renting. It prevents people from easily moving when they lose their jobs. And according to Grace Wong Bucchianeri at Wharton School of Business, homeowners are no happier than renters, and they experience more stress.

The problem is that many of us have misunderstood what a home is. We have been conditioned to believe that a home is a house that we hold the title to. That's simply not true. A home is wherever you live and love. It's where you hang the pictures of the kids. It's where you collapse at the end of the day into the arms of your spouse. A house doesn't equal happiness. A home equals happiness.

It's hard to see the eternal through the temporal. In the words of the old hymn, "This world is not my home, I'm simply passing through. My treasures are laid up somewhere beyond the blue. The angels beckon me from heaven's open door, and I won't be at home in this world anymore."