By Wendy Mihm | March 21, 2011
If you’re pondering the purchase of a house, existing or new construction, first home or second, an important question to ask yourself is “Why do I want this house, anyway?” Because things have changed from even just a few years ago.
Many people who ask themselves “Should I buy a house now?” are asking this question because they’re considering a home purchase either entirely, or at least in part as an investment. And buying a home as an investment may no longer make as much sense as it once did.
Let me show you a graph to give you an idea of what I’m talking about.
Now, even if you don’t love graphs, stick with me a minute – this one is pretty interesting. It shows the history of existing (not newly constructed) home values as an investment over the last 116 years. Values are all adjusted for inflation to today’s dollars.
To me, the graph tells two relevant stories.
(Fancy graph courtesy of the fancy New York Times)
First, the graph tells us a story about the crazy spike on the end.
If you are like many people (myself included) you have a hard time getting recent memories out of your head. If you look at the graph above, relatively recent memories would include that gigantic spike on the far right, which starts rising in the latter part of the 1990’s, comes plummeting down in the mid-to-late 2000’s, then crashes during the Great Recession of 2008-2009.
You might know quite a few people who made an absolute killing buying houses in the late 1990s and even the early 2000’s. We know a power couple who bought up whole sections of Pasadena and flipped the houses like it was a game of Monopoly. They, and lots of people like them, raked in a ton of cash and made it look easy during the upward part of that spike. Memories like this are hard to erase, so many of us still think that buying a house should be almost a no-brainer investment. Yes, even after the crash.
Second, the graph tells us a story about many of our parents.
Take a ruler and lay it down around the ‘60’s or ‘70’s (when our parents’ generation was buying their first house) and put another part down where the line hits 2011. Despite all the crazy ups and downs, you’ll see that the ruler is slanted upward. What you’re seeing is an upward trend, which means their homes went up in value as an investment, even though they probably never intended to buy their home as an investment at all. Here’s how their story went.
My parents, and many people their age, simply bought a “starter home,” then when they grew out of it, they bought one that was a bit bigger, but still sensible. By then, they had been faithfully paying down their mortgage, their first home had risen “predictably” in value, and they had built up a fair amount of equity in their home. This put them in an excellent position to “trade up.”
And so it went throughout their lifetimes – they continued to slowly and sensibly step up the ladder to bigger and better homes, through a combination of faithfully paying down their mortgages and fairly steady increases in home values. Oh sure, there were some “boom” and “bust” cycles in the ‘70’s and ‘80’s but those were quite tame compared to what we just went through. We saw our parents’ generation “ladder up” and as a result, we grew to have similar expectations for our own home ownership experiences. Then that giant spike happened in the chart up there and everything blew up in our faces.
So now what to do?
When you find yourself asking “Should I buy a house now?” go back to the basic question “Why do I want this house?”
If you want the house as a home – and I mean you’re really going to settle in, put some flowers on the porch and teach some kids how to ride a bike—then you may really be ready to buy a house now.
But if want that house primarily because you think it’s going to be a sure-thing investment and make you a bunch of money in a hurry, you might want to think twice.
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