Homeownership has always been part of the American dream, but is buying a house still a ticket to middle-class financial security and a stepping-stone to generational wealth?
Many prominent money experts think not.
Ian Rodda is the CFO at Page One Formula, an organization that helps entrepreneurs grow their online businesses. He’s seen many business owners succeed because they had the capital to invest in their companies — and in many cases, they simply wouldn’t have had the cash to make it work if their money had been trapped in a property.
“Buying a house isn’t always a smart investment because it ties up your capital in a non-liquid asset, restricting your financial agility,” he said.
Rodda also rejects the idea that homes are good investments because every mortgage payment represents a savings deposit you’re not allowed to miss.
Cheri Fisher, a business financial expert with the RFP Success Company, explains the concept of mortgage payments as “forced savings.”
“Mortgage-based home purchases might be a structured approach to saving money,” she said. “A percentage of each mortgage payment that you make goes toward increasing the equity in your home. With the help of this procedure’s forced savings mechanism, you can gradually accumulate riches.
“You raise your ownership stake in the home as you gradually reduce your mortgage balance, which may ultimately lead to large financial advantages. Mortgage payments and future appreciation can result in a significant increase in your net worth because property values typically increase over time.”
Rodda thinks it’s mostly smoke and mirrors.
“The illusion of ‘forced savings’ neglects the reality of significant upkeep costs and property taxes that can eat into your potential returns,” he said. “A well-diversified investment portfolio can often provide better and more liquid returns.”
The diversified portfolio that Rodda mentioned is precisely the reason that Michael Hammelburger, certified financial advisor and CEO of The Bottom Line Group, a cost segregation firm in Baltimore, often advises against buying a house.
“Purchasing a home concentrates a large portion of your wealth in a single asset class, namely real estate,” Hammelburger said. “Because your financial well-being becomes heavily dependent on the performance of the local housing market, a lack of diversification can increase your overall risk exposure. If the market falls or the value of your home falls, it can have a significant impact on your net worth.”
According to Zillow, the average home now costs over $346,000. While the bank floats most of that — currently at an average interest rate of over 7% — the buyer still needs to come up with a lot of cash to get their hands on a set of keys.
“Buying a home necessitates a significant upfront investment in the form of a down payment, closing costs and other fees,” said Hammelburger. “These costs can be a deterrent to entry, particularly for those with limited savings or who prefer to allocate their funds to other investment opportunities with higher potential returns.”
A traditional 20% down payment alone is more than $69,000 for the average home. Some buyers can get away with as little as 3%, but even that is over $10,000 — again, just for the down payment.
Houses Were Always Expensive, but Today They’re Unaffordable
Inflation reduces purchasing power over time, so housing costs from 30 or 40 years earlier always feel almost comically low to contemporary buyers. Naturally, homes today are more expensive than ever before. They’ve always been expensive compared to what the previous generation paid — but they weren’t always unaffordable.
Affordability deals with attainability relative to income and other expenses, and homeownership is more unaffordable today than at nearly any other time in history.
“Housing affordability has decreased significantly,” said Itay Vinik, co-founder and chief investment officer at alternative investing platform Equi. “The Housing Affordability Index, or HAI, is hovering at its lowest level since the financial crisis.”
Vinik cited today’s high interest rates as a chief obstacle to affordability, but today’s buyers also have fewer options thanks to diminished inventory. “A contraction in housing supply means that homebuyers are left with fewer choices on the market.”
According to a recent report from Redfin, middle-income buyers can afford only 23% of the homes currently listed for sale. The market would have to add 320,000 homes valued at $256,000 or less for housing in America to be affordable for average buyers earning up to $75,000 a year.
More From GOBankingRates