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The housing market is white hot—and neither a pandemic nor rising home prices can put out the flames. Mortgage applications to purchase a home have steadily increased year-over-year since May as real estate continues to get more expensive across the country.
Here’s the big question, though: Are Americans foolish for chasing the dream of homeownership—in a shaky economy and pricey market—or is buying a house a good long-term investment?
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Forbes Advisor put this question to nearly two dozen financial and real estate experts. The majority (57%) said that buying a house is a good investment, while 38% said it depends on certain factors and just 5% said that buying a home is not a good investment.
| Yes | No | It depends |
|---|---|---|
| “Owning a home is how most Americans build wealth. A portion of every housing payment made by a homeowner is applied toward paying down the home loan balance (principal payment), which increases the equity in the home and helps to build a homeowner’s net worth.” | “Noble laureate economist and Yale Professor Robert Shiller makes a compelling case that real estate, particularly residential homes, is a much inferior investment when compared to stocks. Shiller finds that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.” | “Our biggest advice to first-time owners is not to look at this as a ‘wealth-building’ move. This is where you are going to live. It’s the place where you and your family will build memories, and it’s not something you can easily cash in, as the roof over your head is shelter for your family. That being said, homeownership can lead to wealth-building. The critical element to consider is location. Where is this home?” |
| —Carlos Miramontez, vice president mortgage lending at Orange County’s Credit Union in California | —Robert R. Johnson,, professor of finance, Heider College of Business, Creighton University in Omaha, Nebraska | —Sonya Mughal, COO of Bailard, an independent boutique wealth and asset management firm in San Francisco |
Net Worth is 40 Times Greater for Homeowners Than Renters
If you’re a homeowner, chances are you’re worth much more than someone who rents, according to the Federal Reserve’s 2020 Survey of Consumer Finances.
Homeowners have a net worth that is more than 40 times greater than their renter counterparts, which reinforces the idea that owning a home is a smart financial move. Homeowners had a median net worth of $255,000 in 2019; renters had a median net worth of just $6,300.
But the advantage of homeownership is not just the property you own (or are mortgaging, for many people) but the financial mindset that helped you arrive there.
In other words, you have to be financially responsible to own a home: you have to save for a down payment, qualify for a mortgage and budget for homeownership costs like taxes and insurance.
This wealth-building mindset likely impacts other financial decisions, such as saving, spending and investing, says Sean Wilson, senior director of product and portfolio solutions and distribution at the financial services firm TIAA.
“Once the home is purchased you build equity through forced savings and now you are an investor. Behaviorally, those are some wealth-building patterns,” Wilson says. “Real estate helps establish a structured and disciplined investment plan.”
Here we’ll look at when buying is a good idea and when it’s probably better to wait.
Your Finances Are In Good Shape
Experts unanimously recommend that would-be buyers should be financially fit before buying a home. That means having enough money saved for emergencies as well as for some retirement savings, a low debt-to-income ratio and a dependable income.
“If a homebuyer is financially stable, able to manage monthly mortgage costs and can handle the associated household maintenance expenses, then it makes sense to purchase a home,” says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors.
Closing Costs Are Important
Homebuyers should also factor in closing costs, which can range from 2% to more than 6% of the purchase price depending on the type of loan, the type of property, the location and other factors.
For example, a $350,000 home with closing costs of 5% will set the buyer back $17,500. This means that homeowners need to stay in the home long enough to recoup those costs. The general wisdom is about five years, but it depends on the market. Prices in some markets rise rapidly, while others can take a tumble due to unforeseen circ*mstances.
“There are exceptions to the five-year rule,” says Jackie Boies, senior director of housing services at Money Management International, a credit counseling service. “If you’ve managed to get into your home with very low upfront costs, with the best mortgage rate possible, or live in a market with skyrocketing rental costs, the five-year rule may not apply to you.”
If You’re A Spender, a House Can Force You to Save
Some people consider buying a home a forced savings account. If you’re someone who tends to burn through money, a house can be a way to direct those funds toward something that typically appreciates over time.
“Generally, a person will make the most money by investing their money into these three things: private businesses and ventures, private real estate, or mutual funds and publicly traded stocks,” says Holmes Osborne, principal at Osborne Global Investors. “If you invest in a home, you can make money in a hot real estate market. But once you figure in taxes, insurance and the upkeep on a home, it’s the least desirable. Of course, it’s better than spending your money on depreciating assets like automobiles and recreational equipment.”
Retirees who have paid off their mortgage have a huge advantage over lifelong renters. Although they still have costs of homeownership (property taxes and maintenance), they also have major benefits such as equity and the ability to leverage this asset in several ways, such as renting out space, getting a home equity loan and downsizing into a less expensive house and pocketing the profit.
“Financing a home purchase with a mortgage offers an opportunity to continuously save for the future by paying down the mortgage each month,” says Brad Lookabaugh, vice president of portfolio management at Unison Home Ownership Investors in San Francisco. “Owning your home also offers the potential for earning a return on the money you put into it.”
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When Buying Real Estate Can Be A Bad Move
Although owning a home can have many benefits, if you’re not financially ready it can have devastating effects. For example, if you stretch your budget or drain your savings to buy a home and then lose it because of job loss or other circ*mstances, this can impact your credit—and budget—for many years to come.
Experts advise that borrowers buy a home well within their budget. Dual-income couples might consider getting a mortgage that would still be affordable under one income. This gives you room in your budget if someone loses their job.
“It doesn’t make financial sense to purchase a home if you are currently renting and you’re having a problem paying your bills or you have very little extra in disposable income,” says Joseph J. Zoppi, managing partner at Templar Real Estate Enterprises in New Jersey. “Owning a home takes considerable money; you have to factor in your mortgage, property taxes, insurance, utilities and maintenance of the house.”
Finally, if you tend to move around often, owning a home can equate to spending a lot of money (on broker’s fees and closing costs) that you don’t have to.
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