Marsha, I can’t decide whether it makes more sense to invest in the stock market or purchase my first home. What are your thoughts on real estate as an investment?
First off, I’m a realtor and not an investment advisor, so for professional monetary advice talk with your CPA or financial advisor. I’ll share my thoughts on real estate as an investment. I don’t view the stock market and real estate investments as an “either or” scenario. Saving and investing for retirement, children’s education or rainy days is essential, and real estate can be a part of your plan. Real estate can help you build wealth and is a highly functional asset. Try living in your stock portfolio!
Many people worry about another real estate implosion, like the one we experienced in 2008 through 2013. Thousands of California homeowners lost their homes and massive amounts of wealth. The problem was not with the real estate itself, but with the manner in which the purchases were financed. Lenders had loosened their credit standards. Buyers were being pre-qualified for adjustable rate mortgages (ARMs) with low “teaser” rates. These loans were never fully explained to the consumers and they didn’t understand the consequences of ARM readjustments. Borrowers were lent money at rates which adjusted up after a set time period. Owners lost their homes because they couldn’t afford the higher adjusted monthly payment.
Even with periodic dips in value, buyers with fixed 30-year mortgages are usually able to weather recessions. For example if you qualified and purchased an $800,000 home in 2005 with a fixed monthly payment of $3,000 a month, you were able to keep your home even when the value fell to $500,000. Why? Because the value of your home fell, but the mortgage payment never changed. Fast forward to 2016 and the value of your home has more than recovered. Now you can refinance at a better interest rate and even lower your $3,000 monthly payment.
You may never purchase any property besides your personal residence and you’ll still accumulate wealth. Property appreciation moves with inflation. Realty also has deep intrinsic value; not only does a house provide shelter, the land can provide food. A solid gold bar has no intrinsic value beyond making jewelry.
Our government encourages home purchases in the form of mortgage tax deductions and also allows profits exclusive of capital gains taxes of up to $250,000 for single people and $500,000 for married couples. With property, you own a hedge against inflation, a manner to transfer wealth and value to your heirs and also have a place to live. For these reasons, it tends to be seen as a less volatile place to put your money. When you consider all this, real estate starts to seem like a good investment.
(The title of this article “Under All is the Land” is the first line in the National Associations of Realtors Code of Ethics)