Are you buy­ing a fam­ily house or a lot­tery ticket?

The Denver Post - - BUSINESS - By Liz We­ston

The same week leg­endary in­vestor War­ren Buf­fett put his Cal­i­for­nia va­ca­tion house on the mar­ket, a friend told me that her wid­owed mother had sold the fam­ily home in Cleve­land.

Buf­fett bought his La­guna Beach place in 1971 for $150,000 and is ask­ing $11 mil­lion. My friend’s par­ents bought their home for $24,500 in 1965 and just sold it for $104,000. Put an­other way: If Buf­fett gets his ask­ing price, his house will have ap­pre­ci­ated at an an­nual rate of 9.79 per­cent. The Cleve­land house eked out a 2.82 per­cent an­nual re­turn.

Homes are a big part of most Amer­i­cans’ net worth. But whether a home pur­chase pays off huge, or pays off at all, is largely a func­tion of ge­og­ra­phy.

It means some peo­ple hit the real es­tate lot­tery, blessed with gobs of eq­uity. Oth­ers can do ev­ery­thing right — buy­ing homes they can af­ford and dili­gently pay­ing down their mort­gages — but have far less to show for their ef­forts.

The so­lu­tion for most of us is to in­vest in stocks, which his­tor­i­cally de­liver bet­ter re­turns than other in­vest­ments and which help you build wealth re­gard­less of where you live.

On av­er­age, home prices na­tion­ally have barely kept up with in­fla­tion since 1900. Most of the na­tion’s hous­ing wealth is con­cen­trated in Cal­i­for­nia, New York, Florida and Texas, ac­cord­ing to an anal­y­sis by the Ur­ban In­sti­tute.

Homes can of­fer tax breaks for mort­gage in­ter­est, prop­erty taxes and cap­i­tal gains, since the first $250,000 of home sale profit per owner typ­i­cally is ex­empt from taxes. But homes also come with con­sid­er­able costs that can’t be de­ducted, in­clud­ing in­sur­ance, main­te­nance, re­pairs and up­grades.

Stocks, by con­trast, never need a new roof and out­pace in­fla­tion over time by a fat mar­gin. The­o­ret­i­cally, my friend’s mother would be more than half a mil­lion dol­lars richer to­day if she and her hus­band had in­vested their $5,000 down pay­ment in the Stan­dard & Poor’s 500 stocks in­stead.

Or con­sider what Buf­fett could have earned. A $150,000 in­vest­ment in the S&P 500 in 1971 could have turned into al­most $14.5 mil­lion — even more than the ask­ing price on his six-bed­room, ocean-view house.

With­out a crys­tal ball, peo­ple need to hedge their bets. Buy­ing a home and pay­ing down a mort­gage can be a kind of forced sav­ings that re­sults in at least some eq­uity, re­gard­less of mar­ket con­di­tions. But most peo­ple should be wary of ad­vice that en­cour­ages them to “stretch” to buy a house or view their home as an in­vest­ment.

“Buy your house for what you need for your fam­ily,” says cer­ti­fied fi­nan­cial plan­ner Tim Oben­dorf of Chicago.

“Don’t count on your home ap­pre­ci­at­ing 5 per­cent a year and be­ing your re­tire­ment sav­ings.”

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.