Economists' Outlook

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NAR Letter to the Editor: WSJ Op-Ed Ignores Important Facts About Owning

NATIONAL ASSOCIATION OF REALTORS®’ Chief Economist Lawrence Yun sent the following response to the Letters editor of The Wall Street Journal in reaction to a July 11, 2011 article, “A Home Is a Lousy Investment.”

July 13, 2011

Dear Sir:

The author ignores some important facts in arguing against the financial benefits of owning a home (“A Home is a Lousy Investment,” July 11, 2011). First, most home buyers do not pay cash for a home, but instead take out a mortgage along with a down payment. Following the author’s example, a home buyer in California who purchased a median priced single-family home in 1980 ($99,550) with a 20 percent down payment ($19,910) would see that investment grow to $296,820 when the home was fully paid off in 2010. Investing the same $19,910 in the Dow-Jones Industrial Index in 1980 would result in a balance of just over $238,000 in 2010 and be subject to taxes on the investment gains along the way.

Second, during the 30-year period while the homeowner is whittling down their mortgage balance and banking home equity, the renter has been paying rent that has increased by an average of 3.7 percent per year even as the monthly principal and interest payments on a 30-year fixed rate mortgage remain level. Based on rental trends, it is not too difficult to come up with reasonable scenarios where the investor who rents a home will pay significantly more in rent than the homeowner will pay in mortgage interest over the span of the 30-year mortgage. That’s because rent payments for a comparable home could easily exceed the principal and interest payment on a 30-year fixed rate mortgage in as few as seven or more years. In the end, the homeowner will have a free and clear asset while the renter will continue to pay rent.

Third, many homeowners also are able to take advantage of deductions for mortgage interest and property taxes when filing their federal income tax return making the cost of ownership even more favorable compared with renting. Furthermore, a capital gains deduction of up to $500,000 ($250,000 for single homeowners) applies when the home is sold.

Fourth, homeownership builds wealth. According to the Federal Reserve’s 2009 Survey of Consumer Finances, the median net worth of the typical homeowner exceeds $190,000 but is less than $4,000 for the typical renter. Given this difference, it’s hard to see how long-term renting is a strategy for financial stability and independence.

And, finally, people who buy homes well within their budget are long term planners. Research suggests that people who are long term thinkers and willing to forego short term gratification do well in many dimensions of life-wellness measures. That is why homeownership meets long term objectives and provides great incentives for people to work hard and lay the foundation for a stable and successful country.

Lawrence Yun
Chief Economist, NATIONAL ASSOCIATION OF REALTORS®
Washington, D.C.

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