The Real Return on Investment for Homeowners

by Tolbert Rowe

Ken Fisher, founder and executive chairman of Fisher Investments wrote an article in the February 19, 2018 USA Today titled “Why buying a home is a lousy investment”. Using San Mateo County on the edge of Silicon Valley, California, he shows that even though property values nearly doubled in the decade between 1995 and 2005 mortgage payments, costs of ownership and costs of selling the property eliminated much of the profit you could realize.

As an owner you are responsible for all maintenance, taxes, insurance and utilities. As an owner, Mr. Fisher theorizes you are making a mortgage payment that is substantially higher than the rent you would pay for a comparable property. He obviously has not looked at residential rent rates on the Eastern Shore of Maryland, or the whole state of Maryland and the state of Delaware. He advocates that a better investment would be to pay less per month in rent and invest the difference.

This is a perfectly logical argument from someone who has made a fortune selling investments and writing books; not so logical from a comfort, financial security and peace of mind standpoint.

Owning your own home is not for everyone, but nearly everyone aspires to be able to call their home their very own. For those that do achieve homeownership paying off the mortgage is the primary goal. 30 years can seem like forever but when viewed in the context of a lifetime financial plan, borrowing long term to acquire your primary residence really is a great investment.

In the past many homeowners took advantage of escalating values by refinancing and taking equity out of their home to support their lifestyle, essentially kicking the can down the road by extending the date when mortgage payments are no more. When market values tanked, a large percentage of homeowners suddenly found themselves “upside down”, owing more than their homes were worth.
The percentage of homeownership peaked during the second quarter of 2004 at 69.2% and hovered there until the 3rd quarter of 2006.
Helped by the proliferation of “no doc loans”, lenient underwriting guidelines and low interest rates, buying a home became almost as easy as buying a car. Demand for housing drove prices to unsustainable levels driven by the notion that “prices will never go down”.

Wall Street created a menu of loan products tailored to buyers, mostly first time buyers looking to cash in on real estate values that were increasing 10% to 20% per year, and in some areas, even higher. Buying your first house was a slam dunk great investment because your house would rapidly be worth more than you paid for it.

Many of these products relied completing on information provided by the borrower, such as “Stated Income, (AKA Liar Loans),“No Doc “Loans where nothing was verified because income and assets were left blank on the mortgage application. All the rules of prudent risk analysis and evaluation of borrower’s ability to repay were thrown out the window. Basically, if you could fog a mirror by breathing on it, you were approved.

And to make it even more appealing to borrow more money than you could reasonably afford, Wall Street created loan products like Payment Option Adjustable Rate Mortgages (ARMS) where the borrower could choose one of three ways to repay, and the easiest way was to make a payment that did not even repay the required interest. Negative Amortization was the result where the loan balance actually went up.

In this environment, were buyers guilty of taking advantage of lenient guidelines or were the Wall Street Rating Agencies and Wall Street investment banks guilty for creating lenient underwriting products in the first place? I blame Wall Street for playing on the emotions and lack of financial literacy of people by creating loan products that made buying and borrowing so easy.

First time buyers today are much different than first time buyers ten to 15 years ago. Buyers today have seen, and many have experienced, the financial ruin imposed on many families when the real estate market tanked in 2007 through 2009. They saw how changing terms in mortgages brought families to their financial knees as their adjustable rate mortgage payments increased by 20% to as much as 35% in the course of one or two years. Suddenly payments that we could easily afford became impossible to make.
Greedy servicing companies had no patience for those who could not keep up their end of the bargain by making their mortgage payments. Suddenly the real estate market was saturated with homes being sold for less than was owed and homes that had been foreclosed upon and were being sold by lenders. This further eroded already declining values. Who would want to “invest” in a home when everyone owning a home was losing money and in many cases facing financial ruin?

A fundamental premise of Mr. Fisher’s investment argument assumes the experience of purchasing and owning a home that you will be living in is a “transactional” relationship. By this I mean there is a beginning and there is an end to the homeownership experience. It begins with the purchase of your first home and it ends with the sale of your last home either upon the death of the owners or the sale of the home to facilitate a move to a smaller, less maintenance intensive dwelling. During this lifetime journey, I suggest that the primary financing product should be a fixed rate mortgage to provide a consistent repayment amount over time.

If we consider that the cost of providing shelter as necessary for survival and payment of this expense enhances the net worth of the owner, be it the occupant through a mortgage payment or an investor through the payment of rent, we can begin to evaluate how best to “invest” these monthly expense dollars.

Let’s assume that a person lives to the age of 85 and will pay monthly housing expenses for a total of 60 years in their life. They will pay an average of $1,200 if they rent during their lifetime or $1,500 in mortgage payments if they own. This mortgage payment includes $300 per month for escrow of property taxes and homeowners insurance, expenses not paid if you are renting.

Over a 30 year period the renter will pay a total of $432,000 for shelter, the homeowner will pay a total of $540,000. Plus, let’s add $25,000 for maintenance and upkeep for a total of $565,000, $133,000 more than the tenant. If the tenant invested this $133,000 over the 30 year period they could have as much as $225,000. If the tenant uses the $225,000 account to pay the rent it will be gone in approximately 20 years, or ages 55-75. But for the next 10 years, ages 75-85 they will need to continue rental payments that will total $120,000.

The owner on the other hand is no longer obligated to pay $1,200 per month in principal and interest payments but is responsible for taxes and insurance of $300 per month, net savings for 30 years is $324,000. If the homeowner invests the $1,200 they are saving when the mortgage is paid off at age 55 into a tax deffered retirement account the savings could be significantly more. If the mortgage is paid off sooner, say in 20 years instead of 30 years, retirement will be even more secure and comfortable with additional hundreds of thousands in retirement investments.

Mr. Fisher’s argument that owning a house is not a good investment is based on several premises.

One is that you can rent a comparable home for significantly less than what you spend in mortgage payments. Perhaps this is true in high cost areas like California, New York, Connecticut, etc., not so true for the Eastern Shore. You just can’t find 2,500 square feet, four bedroom houses on an acre or two in the country to rent. And look what you get for $1,200 to $1,400 in rent. You could borrow $200,000 and own a house for that kind of payment.

The second premise is that the cost of maintaining and repairing a home as an owner directly diminishes the return on your investment, and upon the sale of the property, those dollars are not necessarily recouped. I contend that the financial and logistical security you gain by owning your house far outweighs the cost of maintaining and repairing a home. Also, at some point you could pay off a mortgage and use the savings of not having a monthly payment to replenish funds that were used to repair or maintain the home.

But by far the biggest omission he makes in his analysis is what happens to a family’s monthly cash flow when a mortgage payment is retired. Regardless of when the mortgage is paid off, the sooner the elimination of a monthly mortgage payment occurs the sooner those funds can be redirected to other living expenses, savings, retirement investment, paying off other debt, etc. If you are a tenant you will always have a monthly housing expense that will be significantly higher in your later years (retirement) than your income producing (working) ones.

Mr. Fisher considers home ownership as an investment where you basically purchase a product (house), you leverage the purchase with borrowed money (mortgage), you service the debt for a period of time (term), and you maintain and repair the product (upkeep). Then, at a certain point you sell the house, pocket the proceeds, calculate the difference between what you paid when you acquired the property plus costs of ownership and mortgage payments and subtract the difference from what you sold for and you annualize the difference to calculate a return on your investment. Way too analytical for me.

I suggest you be more practical than analytical when making the comparison. Consider the savings you will enjoy when you no longer have to make mortgage payments. From the first house that you purchase to the last house you will own, make paying off the mortgage your number one priority. And at the very least, manage the mortgage debt so you will enter your retirement years without having to worry about servicing a mortgage. The best return on your primary residence investment will be the relief and security you will enjoy when you hopefully will be able to slow down and take life a little easier.

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