“You need to buy a house." How many times have you heard that? Turns out that could be bad advice. Here's why:
Every year, thousands of Americans jump into homeownership for the wrong reason, usually pressure from friends or family. It turns out a lot of them could actually save money by renting.
MYTH# 5: Investing in a house is a safe investment.
Reality: There are very few risk-free investments and a house is certainly not one of them.
House prices are not a one-way escalator going up. They can also go down. Predicting whether a specific house in a specific market will appreciate is very difficult. As financial columnist Jane Bryant Quinn noted, “any single [house] sale is as much a lottery as trading stock is."[10] If prices do fall even slightly and you have taken out a low or no-down payment mortgage, you could find yourself owing more on your house than it is worth.
Plus, experience suggests that even in a booming housing market, you'd probably earn more on your money in stocks than in real estate. According to the editors of SmartMoney magazine, “compared with the average share prices or even bond returns, house prices plod up at a very slow rate: since 1979, about 4.4% a year.
If you can't do better than that in the stock market, you need to fire your broker."[11] In 2001, Harvard University's Joint Center for Housing Studies found that “in many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning."[12]
Reality Check
“In short, this investment [homeownership] is not a slam dunk. For decent returns on any home, you need either stupendous luck or a holding period long enough to amortize your many costs."[13]
Jane Bryant Quinn
Newsweek Columnist
“In many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning."[14]
Harvard University
Source: National Association of
Realtors; CRSP: Lehman Bros.
MYTH# 6: I can't afford not to buy with these low interest rates.
Reality: Low interest rates may actually serve to make buying more expensive.
It sounds counterintuitive, but low interest rates can actually make housing more expensive, not more affordable. How? Well, if low rates bring a lot of new buyers into the market, housing can turn into a seller's market. Now that there are more prospective buyers competing for the same houses, sellers can demand higher prices.
So, interest rates may be low, but they haven't made housing more affordable if they have also pushed up sales prices. Plus, if interes