21 Aug 2014
93° Mostly Cloudy
Patch Instagram photo by iangood_
Patch Instagram photo by patch
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever
Patch Instagram photo by scrappingforever

Americans Think This Purchase Is the Best Investment – Why They're Wrong

Are you doing the right thing with your real estate investments?

Americans Think This Purchase Is the Best Investment – Why They're Wrong

by  Melinda Carstensen

As a native Floridian who lives and works in New York City, the argument of renting vs. buying often pops up in conversation with friends from home. Blind to the allure of the city that all New Yorkers know, they just don’t get why I tolerate throwing away more than one-quarter of my cash flow on housing, the long-held standard ratio for income: rent.

While you've certainly got to be rolling in dough to own property in the Big Apple, I have never had a desire to own a home, a car or land. Those things have never been defining elements in my “American Dream.” For me, renting is a no-brainer.

Unsurprisingly, it appears that the majority of the U.S. disagrees. In  a Gallup poll released last week, about 30 percent of 1,026 American adults surveyed said they felt real estate was the best long-term investment. Gallup chose participants randomly and questioned them on the telephone. The margin of sampling error was  ±4 percentage points at the 95 percent confidence level, the report notes.

Business Insider’s Joe Weisenthal notes that multiple experts felt Americans’ qualms with homeownership would be forever tarnished in light of the housing crash. But nope, compared with last year, five percent more of Americans surveyed in the poll this year said real estate is a better investment than gold, stocks/mutual funds, savings accounts, and bonds. 

Mathematically, buying makes more sense than renting, so I’ll give my friends that. Zillow’s Krishna Rao calls out the stark differences in affordability trends for rent and purchasing a home in a 2014 report. The report shows the percentage of income spent on rent has reached an average of 30 percent in the U.S., while the average spent on a mortgage has steadily fallen to about 17 percent.

“Nationally, the share of income that households must devote to rent has increased steadily and consistently since 2000, as the increase in rent has dramatically outpaced the growth in income over the same period,” Rao said in the report.

The Daily Beast even wrote this week about  an impending rent bubble burst.

However, when considering inflation, as an investment real estate doesn’t pull much weight. According to the  U.S. Census Bureau Survey of Construction, single-family real estate generated a .74 percent annual return over the last 30 years.

"And this doesn’t even account for many of the miscellaneous costs involved in real estate,” writes Cullen Roche, of  Pragmatic Capitalism.

“A house is basically a depreciating asset that comes with an appreciating piece of land. But that depreciating asset is extremely expensive over its lifetime. When you calculate the total costs that go into maintaining this asset the returns are very likely to be negative over long periods of time. So that 0.74 percent figure is probably higher than you should really expect.”

The homeownership rate for U.S. homes was 65.2 percent in the fourth quarter of 2013, or 0.2 percentage points lower than the fourth quarter of 2012, according to a  2014 U.S. Census Bureau report.

To rank U.S. housing markets in value, Fitch Ratings looked at its quarterly Sustainable Home Price model, which weighs pricing against factors like income growth, unemployment rates, population growth, inventory and the like.  A June 2013 Forbes article explained the system: "If home prices grow faster than the rest of the local economy, then housing is becoming overvalued; if homes are trading for prices lower than the local economy can sustain, then housing is undervalued.”

In the Patch communities around Atlanta, Detroit, Chicago, Las Vegas and Orlando, Fitch Ratings found properties were undervalued, while it found that near Washington D.C. and major cities in California like San Diego, San Jose, Los Angeles and San Francisco, properties were overvalued.

Those figures are interesting, but considering how fickle the housing market is (see: the housing crash), how useful is it to even analyze these values? Sure,  rent may be soaring across the U.S., but at least we renters know what we're getting for our money. I’ve never been one to enjoy gambling.

Have I got it all wrong? How are home prices in your community? And what are your feelings on renting vs. buying?

Share This Article