3Notes: Hurdles to Homeownership


An interesting discussion broke out during the first meeting of Reid Temple AME’s Millennial Faith and Finance series 2017: home ownership. Many in the crowd were skeptical about the facilitator Rev. Loxley O’Connor’s insistence on owning a home as prudent. Understandably, millennials are hesitant to repeat the mistakes of their parents, mentors, or even older siblings in buying houses that they later lost or are underwater on.  Let’s delve into this hesitation.

$1 Historical trends do favor homes as appreciable assets. Though many homes in our community lost a lot of value in the Great Recession, people should understand the magnitude of the housing bubble that preceded the decline. Most of the houses affected simply regressed to their average value. Take a look at the arrow superimposed on housing prices from 1980 to the second quarter 2016.

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As illustrated here, the only time you lose money is if you bought at the very height of the housing bubble in 2005-2007. We maintain our rule of thumb, buy low, sell high. If you bought at this high, you violated our golden rule. The overall housing trend for 35 years shows you never lose money, on average.

$2 Millennials must understand that it’s okay to start somewhere short of the McMansion with the patio and 3-car garage. Buying your first house may mean finding that fixer-upper that you are willing to invest into. Purchasing a home that is habitable and within your price range is exercising the same sort of judgment you employ in buying stocks and bonds. In stocks you look for quality companies, growth potential, and the right price. Why should buying a home, with a decades-long time horizon, be any different?

The overall housing trend for 35 years shows you never lose money, on average.

The key to any proper investment is due diligence, assessment of your current standing, and understanding of your goals in the short, medium, and long term. If the first house is purchased with the intent of making money, it should be purchased somewhere below its potential (aka intrinsic) value. If you are buying in the flashy new development with all of the fanciest amenities (and exorbitant HOA fees), you’re likely buying at or above the potential value. There is little hope that you will resell this house for much more than you bought it, so adjust your expectations. A true investor looks for hidden value. Be sure there is some room for profits.

$3 Every investment carries risk. It is a tough sell to convince ourselves to invest in highly illiquid, very expensive asset as millennials. I get this. However, if you are willing to put money in a stock, bond, or some other vehicle, how many can actually serve you while potentially growing your net worth? Memories, protection from the weather, privacy and other factors are all matters that are unique to a home. These are benefits of your primary residence that are not replaceable and should not be taken lightly. If you are in need of mobility, then yes a home might be wrong for you. Otherwise, do not take this option off of your menu.

What are your thoughts or hurdles to home ownership? Comment below.

-Joe

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