2006/05/20

Home ownership: road to riches or ruin?

I saw 20/20's "Is Buying a Home the Ticket to Financial Freedom?" And was touting Bach and others who promote real estate as a way to wealth.

Yet so much assumption is made: real estate prices will be steady state or go up, jobs will always be plentiful and inflation is always around. And worst of all, that real estate debt is good.

As people saw with the dotcom and Enron bubble, profits can be realized only when you buy low and sell high. If you didn't, you had a loss, no matter how much money you "made" on paper. Real estate is no different: until you sell at a profit, you haven't made any money and unlike stocks, you can't sell a home with a phone call or a click of a button. And when the real estate market drops [as it seems to be doing now], there is no way to avoid a loss if the need to sell is there [job transfer, change in family size, family emergency, etc.]. And if the drop is like in Japan, it can go down for 15+ years (and still counting).

And, there is always the issue of opportunity cost: If you had waited for the price to come down, that same money [say your downpayment] could have been earning interest. And don't forget the emotional cost of owning something that's going down in value: be it Enron stock or a home, knowning that your "asset" going down day after day (or with homes, month after month) will take emotional toil, especially if you're leveraged (i.e., bought it with a loan).

One thing I learned from housing bubble blogs recently is that real estate was hot in Florida in the early 20's, before the stock market crash of 1929 and the Great Depression. And lo and behold, the Florida bubble seems to have begun to unwind, again. Will we get a depression?
Some would expect only a recession but personally, I don't think a depression is not impossible. So much of the U.S. economy is tied to real estate that the post bubble economy may be even more painful than what, say, Japan experienced. But even if we merely have a recession, a lost job is a lost job which can mean foreclosure and fire sale of homes. If your mortgage is upside down (you owe more than your home can be sold for), you may end up owing the IRS since that loss, if written off by the bank, will turn into an income with taxes due! Talk about double wammy: you lose your job then your home and then find that you owe money to the IRS. And don't think a government job will keep you safe since most local and state governments are dependent on taxes on real estate (from property taxes to income tax on realtors to sales tax on building materials). If people stops paying taxes, the municipal government will have no choice but to get rid of employees since, unlike the U.S. federal government, cannot print money to pay for unfunded expenses. If recession turns bad, even the feds won't be able to retain everyone since we are so much in debt today that extra borrowing will not be possible and turning on the printing press will only result in hyperinflation: a financial ruin for all.

So home ownership via debt is a safe choice if economy is growing and jobs are plentiful, but when things turn sour -- as we are about to face, I believe (and some/many on the bubble blogs would agree with me) -- homeownership can result in serious debt which can take years to pay off ... the IRS!