December 7th, 2010 1:51 PM by Lehel S.
Housing isn't the investment it used to be. Or is it?
Certainly if you bought at the peak of the housing boom — say, 2004 or 2005 — it isn't. But most people who took the plunge more recently think it is.
In fact, 85% of a sample of folks who bought houses in the 12-month period from July 2009 to June 2010 view their homes as sound financial investments, according to a recent National Assn. of Realtors survey.
Nearly half the 8,500 buyers and sellers polled consider their homes a better investment than stocks, while 3 in 10 say housing is at least on par with stocks. And the findings are roughly the same across all subcategories: new home or existing, first-time buyer or repeat offender, single or married, male or female.
But participants in NAR's annual Profile of Home Buyers and Sellers were also asked how long they expect to stay in their homes, and their answers indicate that most people have come to the realization that housing as a quick dash to riches is a thing of the past.
The median expected length of residence is 10 years, with repeat buyers planning to remain a median of 15 years.
But is even a decade long enough at today's appreciation rates for an investment in housing to turn a profit? Or put another way, which makes more financial sense nowadays, buying or renting?
To be sure, homeownership isn't for everyone. Some people simply can't afford it, and others simply aren't cut out for it.
Then there are those who simply enjoy their renter lifestyle. They don't have to mow the grass or rake the leaves. When something breaks, all they have to do is call the landlord. And, if they haven't signed a lease, they can pick up and move with proper notice.
Of course, renters give up a lot too. They can't make their home truly their own because they usually aren't permitted to make improvements or even paint the walls any color they choose — only neutrals, please.
And they don't have much of a say when it comes to how their communities are run.
Despite those factors, though, the decision to buy or rent has been pretty much a monetary one.
So forget for a moment all that intrinsic stuff about being able to turn a house into a home, giving your kids their own backyard in which to play and living where the schools are better. If a family has enough dough salted away to cover a down payment and closing costs, if it can qualify for a mortgage and if it can afford the monthly payments, property taxes and insurance, it often buys.
Nowadays, however, many people are thinking twice about homeownership. Otherwise, they would be out there bargain-hunting, snapping up prized houses at rock-bottom prices and record-low mortgage rates, and laughing all the way to the Promised Land.
More than ever, people need to know what makes more financial sense, buying or renting.
That's a problem Steve Rossi faced in the mid-1980s. Fresh out of college, he was told that it would be foolish to buy. But when he looked into the pros and cons of ownership versus renting, "all I got was bits and pieces," he recalls. "Nobody really had the whole picture."
So Rossi turned to his older brother, John, a computer specialist, and together they wrote a program that answered Steve's question: After six years as an owner, he would turn a profit.
"How long you stay determines whether or not ownership will be profitable," Steve says. "If you buy today and sell tomorrow, you are going to lose money. But the longer you live there, the more it pays to buy."
Steve still lives in the Annandale, Va., house he bought 26 years ago. By day, he and John work for Uncle Sam. By night, the brothers have turned Steve's dilemma nearly three decades ago into a business telling anyone who asks how long it will take his or her house to make money.
Years ago, most people came to the Rossi brothers through the Learning Annex, a Washington-area open university where they taught the class To Buy or Not to Buy — That Is the Question. But now, thanks to the Internet, their reach is much wider. In fact, it doesn't matter where you live. If you can answer some basic questions at their site — http://www.tobuy.webs.com — and have $10 to spare, they can tell you when you will reach the break-even point.
When they first started, the brothers needed answers to 17 questions, things such as how much you expect to spend on utilities, insurance and maintenance, and where would you put the money if you don't invest in a house. Now, they've pared their list of questions to 13.
The simplified "Buy or Not Buy" questionnaire doesn't ask what you spend on utilities — the Rossis' computer program adjusts for that automatically — but it still wants to know what you think you would be earning if you invested in something other than real estate. After all, Steve says, "money spent is money not being invested, so you have to adjust accordingly."
Don't worry if you can't answer all the questions. The questionnaire has all kinds of prompts along the way, such as "3% is reasonable" when figuring the escalation rate of your utilities, maintenance and insurance. Even if some questions are left blank, the Rossi brothers have done so many of these analyses that they can answer them accurately for you, and all the information you provide is strictly confidential.
There are other programs that claim to do the same thing as the Rossis'. But most of those are written for or by real estate professionals who would like to sell you a house. The Rossi brothers, on the other hand, are independent and have nothing to gain whether you buy or not. Indeed, if there is room for bias in their program, it appears to be in favor of waiting.