An Increasingly Uncommon Investment: Putting a Roof over Your Head
As an investor, I’ve always fancied myself as a contrarian who goes against the crowd, someone who can detect patterns and notice minutiae where others can’t. Perhaps that’s why at the age of 27, while my friends and peers were content with gifting one of their two monthly paychecks to their landlord, I became a first-time homebuyer. That’s a gift too generous for my taste.
Most people my age haven’t considered buying a house. Homeownership has been in a steady decline since peaking in the early 2000s. Millennials, Gen Xers, and Gen Yers have all been shell-shocked by the financial crisis. The combination of anemic GDP growth, low wage growth, and the heavy burden of student loans has had a sisyphean effect on not only our ability to achieve, but also our predilection for homeownership. As a result, homeownership is at it’s lowest since 1965.
But what many millennials, potential homeowners, and investors all need to remember is that buying a home can be exceptionally lucrative, especially when Uncle Sam wants so desperately wants YOU to become a homeowner. Homeownership is a pillar of the American Dream and preserving it has enormous social and political consequences. There are many people, organizations, and entities with a vested interest in preserving home ownership, and as a taxpayer and resident, you should be taking advantage of this.
Inevitably, for most people, purchasing a home ends up being one of the largest investment decisions of their lives. So with all this in mind, it’s no wonder that many people may be cautious-indeed, overly cautious-when it comes to buying a house.
To quote investing legend Peter Lynch in “One Up on Wall Street”: "Before you do invest anything in stocks, you ought to consider buying a house… in 99 cases out of 100, a house will be a money-maker."
Here’s a laundry list of reasons that purchasing a home is a smart investment.
A conventional Fannie Mae/Freddie Mac loan is amongst the cheapest debt available to individuals in the world, a byproduct of conservatorship and, by extension, sponsorship of this debt by the US federal government. (I could write another article on this topic alone.)
You have to put as little as 3% down on a conventional Fannie Mae/Freddie Mac mortgage. Keep in mind that putting less than 20% down will tack on mortgage insurance, making your loan more expensive. On the flip side, you have more leverage, which boosts your “investment” rate of return.
Leverage 5x with only 20% down on a mortgage (even more if you put less down).
There’s no margin call on your leveraged bet. As long as you can make your monthly payment, your stake in your investment is safe.
Mortgage interest payments, origination fees and points, and property taxes are all deductible from federal income tax.
You can book non-taxable capital gains on your investment if the subject property is your principal residence for at least two out of the prior five years.
State and local tax credit programs exist for households under certain income levels (varies by state).
A lot of these items might seem overly technical and esoteric, but I guarantee that if you do the research and take the time to do the math, the benefits of owning vs. renting become quite clear. Some of the tax loopholes available to homebuyers do not exist anywhere else in the investment world. Where else can you find tax-exempt capital gains after just a two-year holding period?
Effects of Monetary Policy
When you consider the post-crisis economic environment and monetary policies, homeownership also makes sense. Monetary policy has been aggressive. As a result, interest rates and, more specifically, mortgage rates, are at historical lows, although they are rising as we speak. And instead of fiscal stimulus, we’ve been treated to “negative fiscal policy,” as M&T Bank CEO Robert Wilmers puts it, in the form of regulation and legislation that have put a damper on growth.
The bottom line is that it has never been cheaper to borrow money. What do you do when interest rates are low? Investing is no longer as attractive as fixed income yields slow down to a slight dribble. Lower yields are left in the dust as the face value of your investment is eaten away in a rising rate environment. Stocks are a good option, but we have been on a eight-year bull market and prices and multiples are now above historical averages.
The answer, according to a rational person following Keynesian economics, is to borrow.
I’m not here to tell everyone to buy a home, but I am here to urge everyone to be a smart and well-informed investor. Please carefully consider the benefits of homeownership and taking on a mortgage. Interest rates are still historically low, and tax policies still benefit homeowners enormously. There’s no guarantee how long either of these will last in the current economic and political environment.
While buying a home may make financial sense for the time being, once it no longer does, it’s time to move on to the next investment.
About the Author
The child of hardworking immigrants, Stanley Chen, CFA, grew up in Boston, Massachusetts, matriculating at Brandeis University and earning a master’s degree in International Economics and Finance. Upon graduation, he began working at BlackRock, helping individuals manage their financial affairs and plan for retirement. He moved to the Institutional Client Business and began advising clients on a much larger scale, working for institutional clients such as pension plans, foundations, and endowments.
He’s now at Clara Lending, taking a hands-on approach to helping average middle-class Americans achieve their dreams of financial freedom and home ownership.