Buying a home is generally considered a good way to spend money, but is a declining real estate market the right time to buy? How about markets where long-term prices have risen slower than average? What if prices had a big run-up and haven't fallen much?
Those are the wrong questions because they focus on changes in prices, say Gary Smith and Margaret Smith, authors of a new book, Houseonomics: Why Owning a Home is Still a Great Investment. Buying a home can be a smart move, even if prices stay flat over a long period, say the husband-and-wife team who, respectively, are an economics professor at Pomona College in Claremont, Calif., and president of a financial planning firm.
"All people think about is how fast prices go up," Gary Smith said. The more central question is, "How much money can I save on rent?"
The basis of their argument is you have to live somewhere. If you buy, your house can generate an income. The income, what they call the "home dividend," is equal to the money you save by not renting, plus the tax benefits of having a mortgage, minus the payments and other home expenses.
Many consumers have considered the rent-savings concept in general, having a vague notion that they're throwing away money on rent. But it looks a lot different, and compelling, when you flesh it out with numbers.
A couple of years ago, while many housing experts were screaming about bubble markets, the Smiths were analyzing data and concluding that many markets, including Indianapolis, Dallas and Atlanta, were not bubble markets. In fact, houses there, based on their home dividends, were big bargains.
Consider a house in the Indianapolis suburb of Fishers, Ind., that sold for $135,000. Annual rent savings for a comparably sized dwelling totaled $15,000, while the mortgage tax deduction was worth $2,447. Subtract the annual mortgage payments, property taxes, insurance and maintenance, and the new owners were left with a house dividend of $5,622.
And the return, compared with renting, increases each year as rents rise.
But the return excludes expenses incurred in buying and selling a home, such as closing costs and real estate agent commissions, because they aren't incurred every year.
The point, though, is that you can have a tremendous investment return from your house that has nothing to do with an increase in its potential sale price.
Gregory Karp writes for The Morning Call in Allentown, Pa.