I don't have much money, but boy if I did,
I'd buy a big house, where we both could live.
"Your Song," -- Elton John.
*
But Elton, would that be a wise investment?
What if home values were declining in your area?
What if you planned to move in a couple of years?
Would you be better off renting and putting your down payment money in, say, Treasury bills?
Ah, the dour questions that economic reality invents to quash poetry.
Buying a house continues to have the emotional pull that makes good song lyrics. But the sag in home price appreciation over the last couple of years -- and the decline in prices in some areas of the country -- have caused concern over whether a house is still a solid investment.
Well, relax, Elton, and all you other bards of home and hearth. The analysts' recommendation on homes is still buy -- although with important qualifications.
"After looking at the figures and at most people's financial position, a home has to be the first investment that people should make, and perhaps the most important," said Robert Genetski, president of Genetski and Associates, a Chicago-based economic analysis and forecasting firm.
And the calculations don't even take into the personal, psychological and social arguments for an owned home rather than a rental property as shelter.
Can you lose money on a home? Sure. It's happened to plenty of people in the last few years, especially in the Northeast, where some have had to bring big checks to a closing in order to sell their homes.
"Some people have suffered from homeownership," admitted Donald Leavens, director of tax research for the National Association of Realtors. "Like any investment, things can go bad."
But by and large, even without the tax credit, analysts say a home makes money sense. The main reasons:
* Taxes. The federal tax system overwhelmingly favors homeownership, allowing deductions for mortgage interest and property taxes. If you rent, you're almost certainly paying your landlord's mortgage interest and property taxes -- and getting no deductions.
In addition, when you sell your house and buy another one for as much or more money within two years, you don't pay taxes on profits from the sale of the first house. And at age 55, you can shelter up to $125,000 in profits from a home sale without ploughing the money into another house.
* Leverage. If you pay 20 percent down on a $100,000 house, you've paid $20,000. If the home price appreciates by 20 percent, to $120,000, you've actually made not 20 percent but 100 percent on your down payment investment.
* Forced savings. In paying off your mortgage, you are building up equity in your home and likely adding more with appreciation as well. Thus your mortgage payments are a form of savings that you will cash in on when and if you sell your house.
"Buying a home is one of the few forced savings methods that consistently works," said David Perry, director of financial planning at the Homewood, Ill., accounting firm of Friedman & Huey Associates.
"If you try to discipline yourself to put $100 a week in a mutual fund, you might skip a few weeks. You won't do that with your mortgage payments," Mr. Perry pointed out.
* Borrowing power. With home equity loans you deduct the interest on loans up to $100,000 for any purpose. You can also cash money out of your house by refinancing it at an increased value, if there has been appreciation.
And gradually coming on line are reverse mortgages, which basically allow those 62 and over to get cash for their homes while still living in them.
* Inflation control. Rents will go up with inflation, but your mortgage payments are most likely fixed, or at least fairly predictable even with an adjustable rate loan.
Of course, taxes and maintenance costs will go up, but remember they will go up for a landlord, too, who will pass them on to you.
All of the above advantages are of little solace, of course, if your home is actually declining in value. But how likely is that to happen?
The depreciation phenomenon in recent years has affected parts of the West and Southwest and hammered the Northeast. According to the National Association of Realtors, the median price of existing single-family homes in the Northeast dipped from $145,200 in 1989 to $141,200 in 1990 to $140,000 in 1991.
A Chicago Title & Trust report notes the median price for all
homes in Boston from dropped from $166,200 in 1990 to 'D $162,300 in 1991. Other major markets, from Los Angeles to New York to San Antonio, have suffered varying periods of decline in recent years.
The depreciation fears were intensified by a flurry of articles on the subject in national magazines in 1990. A much-debated study by Harvard economics Professor Gregory Mankiw predicted that post-Baby Boom demographics would send inflation-adjusted housing prices down 47 percent by 2007.
A good part of the reason for the sag, however, was that prices in the areas affected rose stratospherically before they began to drop as the last decade turned.
"The East and West coasts saw the greatest appreciation in the latter 1980s," said David Arts, chief financial officer for Century 21 Northern Illinois. "They were looking at double-digit annual appreciation, more than 20 percent in certain markets, and they were thinking this was manna from heaven."
Indeed, Realtors' figures show the median price in the Northeast rose from 88,900 in 1985 to $143,000 in 1988 -- a 61 percent increase in three years.
And before you feel sorry for those house-poor folks, remember that even in 1991 the median home price in the Northeast of $140,000 was almost double that in 1983: $72,200.
Those who were hurt, noted Mr. Arts, were the ones who bought at the top of the market and then were forced to move when the bottom fell out. Transferees especially run risks in such situations, he pointed out.
Some certainly suffered, but they cannot be considered typical, since the average owner holds on to a home at least seven years, according to the Realtors' group.
A psychologically negative effect of the boom market, Mr. Arts noted, was that the public began to expect that a home would be a no-lose gold mine, and normal rates of appreciation seemed insipid. But boom appreciation is an aberration.
"The reality is that you do get at least the inflation rate in appreciation," said Mr. Arts. "I've rarely seen it dip below, and it's generally been 2 to 2.5 percent over in the last 15 to 20 years," he said.
How do you avoid the risk of a downturn? Simple. Don't buy too high.
"I would be cautious about buying any asset whose price had become highly speculative," said Mr. Genetski. "That would be true of stock at certain points in time and of housing prices."
Looking at housing purely as an investment, could you do better investing your down payment elsewhere? Maybe. Glenn Crellin, director of statistics and surveys for the Realtors, looked at 1980-1990 median home prices and found that housing yielded an annual return of 13.4 percent on a typical down payment.
Mr. Crellin said that was higher than Treasury bills, which produced an average of 10.3 percent, but lower than common stock, which yielded 15.5 percent including both price increases and average dividends produced throughout the decade.
He concluded that an investor looking solely to maximize yield shouldn't choose housing, but he noted that the returns were still solid. And he didn't even take into account the fact that if the common stock investor were a renter, he would be losing the edge by having to pay increasing rents.
The relative financial advantages of homeowning shouldn't blind you to the expenses, warned financial planner Perry, adding that the costs are usually higher than you expect.
"In the middle of the night, the house goes through your checkbook and takes what's available," he said.
Not only do repairs come along unexpectedly, but owners tend to spend more on furniture and other household items than they would in a rental unit, he pointed out.
And with today's prices, even a 10 percent down payment is likely to require $10,000-plus. For many, that will mean borrowing from relatives and/or doing without vacations and new cars for a while.
There are some people who simply shouldn't buy, even if they can, Mr. Perry added. Mostly, it's a question of time. The usual rule of thumb is that if you are going to stay in a place less than two years, you should seriously weigh renting instead.