Don Rowe
Don Rowe Realtor/Broker
  • (502) 314-0522 (c)
  • (502) 238-2441 (o)

Is Owning a Home a Good Financial Choice?

Many local realtors in Louisville have commented on Robert Shiller’s current comments on the investment thought and feasibility of homeownership. Robert Shiller is a Yale professor and co-founder of the Case-Shiller Home Price Index.  It is well-known for creating provocative comments on home prices and also the monetary advantages of owning a home.

In a current Bloomberg interview, Shiller responded to a query about homeownership as an investment this way: 

“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don’t expect it to come back." Do I have your attention? " Not with the same strength. So people might just decide, ‘Yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do.” That was also a 180 degree shift from his earlier opinions.  (Click the image below for a GREAT buying versus rent calculator).

Buting Versus Rental

Today, we would prefer to question Shiller’s belief by providing three solid economic (strictly economic) factors that make buying a home a solid investment:  

  •  You cannot live inside your IRA   Whenever you purchase your own house you're not taking available dollars away from another investment. You're replacing one housing expense (rent) which has no potential for any type of return with another (mortgage payment) that does provide you with an chance to get a return. We understand that there has been research showing that over the last 30 years renting has been less costly than owning. That study also assumes that you invested the savings over 30 years between the rent payment and mortgage payment.  Big assumption.  You might have done better financially. You will find two problems with this conclusion: Today, in the greater part of the nation, renting is actually much more costly than owning a house. That is a fact. If you don't believe us, go to our property search and look for rentals, then compare them with the monthly mortgage payment.
  • History has also confirmed that tenants DO NOT invest the difference between their rent and mortgage payments.   Homeownership Creates Wealth   Paying a mortgage creates what financial specialists call ‘forced savings’. The Joint Center for Housing Studies at Harvard University released a study titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. Within the study, they really quantified the distinction in wealth between renters and property owners.  Please read what they said:   “Renters have only a fraction of the net wealth of owners. Close to the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600-about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would nonetheless be 27.5 times the median for renters.” THAT IS AMAZING!  
  • You will find Tremendous Tax Benefits to Investing in a House.  You will also find tax deductions for home improvement. There's no doubt that selling an investment like gold is simpler than selling your house. Nevertheless, this liquidity comes at a cost. The cost is called capital gains. That's the tax you pay on any monetary gain you receive from the investment. Did you sell Apple stock this year?  You are finding out about Capital Gains tax right no! This tax does not apply exactly the same way whenever you sell your main residence.
  • You might qualify to exclude from your income all or part of any gain from the sale of your main house. Check with your tax man but in the tax code, there is a term called: Maximum Exclusion.   You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:  You meet the ownership test.  You meet the use test.  During the two year period ending on the date of the sale, you did not exclude capital gains tax from the sale of an additional home? In the event you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions listed above.   You might be able to exclude up to $500,000 of the gain on the sale of your main home in the event you are married and file a joint return and meet the requirements.
  • We will let you determine for yourself whether homeownership makes sense financially. If you have questions, call us or send us an e-mail.