When you drive a new car out of the dealership, the value drops by hundreds or even thousands of dollars. This is an accepted fact of life. So why do people expect to make money every time they sell their homes?
Rising home prices of the 1990s and early 2000s supported the illusion that buying a home was an investment. Then, though, the bubble popped, and the trend reversed with a vengeance. In my mind, we're now back to the natural order of things: Buy something expensive and use it for a few years, and you should darn well expect that the wear and tear you inflicted would make it worth less to the next owner.
Homebuilders and real-estate agents will never agree with this view, of course. Toll Brothers (NYSE: TOL ) , Hovnanian Enterprises (NYSE: HOV ) , and Meritage Homes (NYSE: MTH ) have all been turning things around slowly but surely, as big losses have turned into smaller losses and even modest profits in some cases. But they still need to convince buyers that they're building long-term wealth with their new-home purchases in order to draw would-be "investors" and their demand for their products.
Even now, homeowners are clinging to the old myth of increasing value, refusing to accept a simple truth: Lower your price tag and you'll sell your house. If you can't accept the more modest reality that took the place of the latest tulip-bulb-like craze to hit housing, you'll never sell and will keep owing mortgage payments until the cows come home.
Moreover, even if you eschew leverage and pay down the entire mortgage balance before passing the home on to your kids or grandchildren, I'm convinced that your family would be better served by renting a home on the cheap and investing the difference in the broad stock market ETFs, SPDRs or Vanguard Total Stock Market ETF. The real daredevils out there can do even better by learning how to separate the wheat from the chaff and beat the overall market in the long run.
But as for real estate, forget about turning your personal residence into big wealth. That dream turned into a nightmare for millions, and it isn't coming back anytime soon.
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