A week ago, we posted an item on the perception that residential real estate is often a great investment (when the residential real estate market is falling off a cliff, of course). We've always thought that perception was flawed, not in the sense that it's always and everywhere wrong (because in some places and times it can be fabulously right), but in the sense that it reflects a very narrow sense of the costs and benefits of acquiring and possessing residential real estate.
In that post, we drew on a Wall Street Journal column by Brett Arends. Apparently Arends got so much feedback on that initial item that he had to write more on Friday. And once again, he got it right. After discussing tax benefits, transaction costs, the illiquidity of the collateral, and other considerations, he closed with this:
The real benefits of home ownership are any capital appreciation, plus the imputed rent, minus the effective cost of the mortgage and property taxes, other costs, and the return you could earn on your down payment elsewhere.
That's a complex figure, and it varies widely. But if your home's appreciation is lower than the annual cost of borrowing, as it has been for many over the last 20 years, leverage is not much of a friend.
Brett Arends, "Is Your Home a Good Investment?" Wall Street Journal, May 27, 2009
Brett Arends, "Why Your Mortgage Won't Make You Rich," Wall Street Journal, May 29, 2009