Today, I’d like to continue our video series on Buying A Home and Today, I’d like to discuss Why A Home Is (Usually) A Sound Financial Decision
Despite, in my previous video, mentioning the risks and downsides of homeownership, here are some advantages over traditional investments:
First is Forced savings: Every month homeowners are required to pay their mortgage or risk losing their house to the bank. That risk is a great motivator for people to make timely monthly payments. It may take several decades, but over time, the mortgage will be paid off and the entire asset will be owned by the homeowner.
Next is Illiquidity: Illiquidity has its negatives, which I mentioned in my previous video. However, there are also benefits. Gyrations in housing values are not felt as acutely as the stock market. Investors can view their stock performance to the second. A scary headline or a rough month can cause panic. However, it’s impossible to accurately price your real estate every day. This offers the illusion that while your stocks are falling, your home value has remained stable. This psychological benefit minimizes the desire to make impulsive and imprudent decisions, which are common when investing in the stock market.
And finally there is typically a Long holding period: According to ConsumerAffairs.com, on average, a homeowner stays in a home for almost 12 years. In some parts of the country, like Los Angeles, folks average nearly 19 years in their home. In the frum world, this may be even longer, as families plant their roots, raise their kids, send them to the local yeshiva, and are comfortable with the Jewish amenities in the area. One of the keys to financial success is sticking with an investment for the long term.
The illiquid and forced savings aspects, along with the personal reasons for sticking with it, make a home a reliable long-term investment. Even assuming a mediocre return of 3% after expenses, there can be significant dollar appreciation in your home value after holding it for decades. Anecdotally, from working with hundreds of families, a home makes up a significant portion of many retirees’ net worth and offers them the option to comfortably live off the proceeds from the sale of that home in retirement.
In my next video I will share when homeownership is still a mistake.