By: Laura Walton AFC®
The headline caught my attention. A long-standing cornerstone of the American Dream has been owning a home. Dreams are powerful, but current generations are rethinking this one.
The article, by Liz Weston writing for Nerd Wallet, gives two examples. Perhaps you read recently that Warren Buffett’s Laguna Beach home is for sale for $11M, a 9.79% annual increase over the 1971 purchase price of $150,000. Had he, instead, invested his $150,000 in the S&P 500, his account balance would be $14.5M today. Or, better yet, had he invested it in his own Berkshire-Hathaway stock, his balance would be $800M! And, as an aside, stocks don’t need new roofs, A/C units or updating and, historically, outpace inflation nicely.
By contrast, an acquaintance of the author sold her home in Cleveland for $104,000, just a 2.82% annual increase over the 1965 purchase price of $24,500.
Obviously, some housing markets are hotter than others but counting on your home to out-perform is a gamble – sort of like picking the winning stock. According to David Blitzer, managing director at S&P Dow Jones Indices, publisher of the Case-Shiller Home Price Index, average home prices nationally have barely kept up with inflation since 1900.
Most housing wealth is concentrated in a few states: California, New York, Texas and Florida. A recent article in Sunset Magazine featured the 2017 Best Places to Live. It was interesting to me to see the comparison between the median homes prices and median incomes in those areas. At today’s 30-year mortgage rate, some areas were unaffordable by definition (using a standard lending benchmark which compares the full mortgage payment – principle, interest, property insurance and taxes – to the borrower’s gross monthly income; the ratio should not be greater than 28%).
*PITI based on 10% down, 3.83% interest rate, average homeowner’s insurance (valuepenguin.com)
The take-away? Buy a home to meet your needs (not wants) and count on your investments to beat inflation and grow your money for retirement.