Should Homeownship Be Part of Your Retirement Plan?
Homeownership used to be considered the American Dream. Most baby boomers grew up with a goal of owning their own home. Now, many members of the younger generation question whether it is a good idea to buy real estate.
No wonder -– having watched the housing market collapse five years ago, combined with a difficult job market, buying a house or condo may not be a wise move anymore. Homeownership has been steadily falling from its high of 69.2 percent in 2004 to a current rate of 65 percent, according to the U.S. Department of Housing and Urban Development. So, is it a good idea to buy a house or condominium? To be clear, this is a question about purchasing real estate as a residence, not as an investment. When considering whether to buy, there are three major issues to consider: liquidity, return on investment and the personal use value.
Liquidity is the first issue to consider. Buying or selling real estate is timely and costly. It is generally not a good idea to make a purchase unless the property is expected to be owned for a long enough time period to recoup expenses and not result in a fire sale if circumstances require moving. For example, it may not be a good decision to buy a one-bedroom condominium if you expect to have a child in the next few years or to commit to a house if a pending job change may require you to relocate to another city. Obviously, if there is the possibility of buying a new house without selling the first, the illiquidity of real estate is not a problem. However, most people don’t have enough liquid cash reserves to invest in multiple houses and wait out the market for an opportune time to sell.
A second issue is the return on real estate. Real estate has not seen the same capital growth as the stock market over the past quarter century. Nonetheless, real estate provides diversification to a portfolio and returns can be amplified by leveraging the purchase with a mortgage. For example, an individual buying a house for $100,000 with a $20,000 down payment will realize appreciation on the full $100,000 from the date of purchase. Although the rate of return on housing does not change, the gain on the investment is significantly higher.
Finally, it is important to consider the personal-use aspect of housing when making a purchase. This concept can actually work in two directions. When purchased as a residence, houses are providing personal use as well as an investment return. This means a homeowner can live in the house and avoid paying rent while also experiencing gain on the house through appreciation. Yet that appreciation is locked in because the homeowner cannot tap into it without selling the house and losing the place to live.