Last week I wrote about why housing has historically made a poor investment. Many of you disagreed and poked holes in my assumptions, which is fair. In a rebuttal, Barry Ritholtz wrote: "Blame the recency effect. People have a disconcerting tendency to give more weight to what just happened than long-term trends." Guilty.
But two rebuttals came up in comments and emails that I find rather overrated.
1) Housing is great because of the mortgage interest deduction.
The mortgage interest deduction is probably the most dangerous tax advantage we have, because almost every homeowner thinks it helps them when in reality many see no benefit. To write off your mortgage interest, you have to itemize your tax deductions. But about half of homeowners don't; they take the standard deduction. According to the Tax Policy Center:
24 percent of tax units will benefit from the deduction in 2015, compared with 47 percent who will have some mortgage interest expense. The percentage of tax units who will benefit ranges from over 60 percent for taxpayers with cash incomes between $100,000 and $500,000 in 2012 dollars to less than 10 percent for taxpayers with incomes less than $40,000 ... many who are paying mortgage interest either have no positive income tax liability or claim the standard deduction, and therefore do not benefit from itemized deductions.
2) Paying a mortgage is forced savings as I build equity.
This is another point that is true in theory but greatly diminished in practice. The average home is owned for about eight years, according to the Census Bureau. The U.S. Department of Housing and Urban Development writes, "Of all households beginning spells of first-time owning, we estimate that 75 percent will complete 3.1 years of owning, 50 percent (median) will complete 8.1 years, and 25 percent will complete 17.3 years."
I have met several smart people who think that if you have a 5% mortgage, 95% of your mortgage payment goes toward principal. It doesn't. When you finance 8 years of home ownership with a 30-year mortgage, the amount of equity and "forced savings" you accumulate is minor due to how a mortgage amortizes. In the first five years of a 30-year mortgage at 4.5% interest, between 77% and 71% of a mortgage payment goes toward interest. At no time during the average homeowners' life will a mortgage payment be less than 65% interest:
In practice it's actually worse than this, because so many homeowners refinance. According to data from Freddie Mac, the average mortgage was held for 3.1 years between 2000 and 2006. Granted, that was during the bubble years and a time when interest rates were mostly falling. But it means that for all those years of glorious "forced savings," interest made up close to 80% of an average homeowners' mortgage payment. Factor in realtor costs and the job mobility benefits of renting, and I wonder if that 20% of equity building was really worth it for most people.
Josh Brown wrote:
I own my home and I consider it my greatest investment. It gives me confidence and satisfaction. It provides a sense of permanence for my children. It makes my wife happy to decorate it, landscape it and care for it. Plus, I like not paying rent, something I spent most of my twenties doing in Manhattan. I have no mortgage so my only ongoing cost outside of maintenance is property tax, which I look at as an investment in the town's school district and as a barrier of entry that keeps the other homes around me filled with hardworking, productive members of society.
Whether or not my home's price will exceed the rate of inflation in the next few decades is irrelevant to me. Especially because I invest elsewhere – retirement accounts, my own business, etc.
Can't argue with that. You?