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YOU DECIDE: Is homeownership still a wise move?

June 29, 2007

By Dr. Mike Walden
North Carolina Cooperative Extension Service

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.
It's amazing how quickly perspectives can change. Just a few years ago, a person or couple was thought to be out of touch, financially speaking, if they didn't own a home. Then, it seemed like people owning a home only a few months could turn around and sell it for a profit.

Today the tables have been turned. Homes are taking much longer to sell, some homeowners have had to foreclose on their dwelling, and the residential construction business -- nationwide -- is way off. Owning a home doesn't appear to be the instant road to wealth it once was.

What happened? Well, like any investment market -- and make no mistake, homes are an investment -- the housing market goes through cycles. The market will boom for a while, then cool off, then boom again, and then cool again, and so on. People unaware of these cycles often think the boom or bust they're currently in is the first time it's ever happened. But it isn't!

A major driving force behind the housing market cycle is interest rates. Low interest rates make it easier to buy a home, so more people do, and all this buying drives up prices. But the reverse happens when interest rates rise, as higher rates reduce the number of buyers and cause housing prices to come back to earth.

Does the movement of interest rates explain what's happened to the housing market the past couple of years? It sure does. Earlier this decade, interest rates were low; in fact, the lowest in two decades. This made home owning very affordable and very appealing to many people, and lots of people jumped in to buy. In fact, so many did that the percentage of households owning a home set an all time record high.

Then the inevitable happened -- interest rates rose -- as they always do. Mortgage payments went up, some owners couldn't afford them, and the air began to leak out of the housing market balloon. Today, homes are still selling, people are still buying, but price appreciation has dropped, and the market isn’t booming.

Which is probably good because like most things, owning a home is neither as great as some say nor as disastrous as others claim.

For example, consider the statement, which I'm sure you've heard, that renting is just throwing money down the drain. At the end of your lease, you don't have anything to show for the money you've spent. With owning a home, you're told, your money builds up in the value of the house.

There are two problems with this statement. First, if the house doesn't rise in value, or increases very little, then it may not be a great investment. And second, renters have the opportunity to invest money that they would have used to buy and own a home -- money like the down payment plus other monthly expenses -- and the earnings from these investments have to be considered in any fair comparison of owning versus renting.

On the other hand, the naysayers who today are arguing against home owning are probably stretching things too. In most parts of the country, home values are still rising; they're just not rising as much as they were in the past. It's very rare for owners to find they have to sell a home for less than they paid for it.

So what am I saying -- is home owning good or not? I guess I'm taking the logical middle ground, the ground I've staked out for almost 30 years of educating people about economics. Home owning shouldn't be looked at as a way to make a fast buck. Home owning is best suited for people who plan to be in the home for a while, say at least five years. In this case, owing a home will give you both a great place to live as well as a reasonable return on your money.

One word of caution though. Check out the ins and outs of any mortgage used to buy a home. Ask about the worst-case scenario situation if your house payment increases the most it can and see if you could still afford it. To quote a well-used phrase, "forewarned is forearmed."

Home owning is still a big part of the American Dream, and it certainly can be if you decide to look at it in reasoned, educated and cautious way. But don't forget -- reserve Saturday mornings for all those around the house chores!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at June 29, 2007 08:30 AM