Here’s my opinion of how the team works best: As with any team, communication is the most important component to getting the desired results. Being the center of the action on the field, the quarterback (you) needs to honestly talk with your coaches and coordinators, so they can help direct you on the proper play calling. Simultaneously, you need to heed the feedback from your offensive line, running backs, and receivers to filter wise advice from emotion. Be the quarterback of your own home-buying process and you’ll be more likely to realize your dreams (and not the dreams of someone else).
Given that it’s Superbowl Week (Go Giants!), I thought we might go with a football theme today. I can’t tell you how many different people I hear proclaim that they are the quarterback of the real estate transaction – the agent, the loan officer, an attorney, accountant or financial planner. But for goodness sake, the buyer/borrower had better be the one calling the shots. Not that everyone else doesn’t play an important role, but the buyer/borrower is the one most impacted by the choices made.
Who are the people selling them on the American Dream? Their parents! It seems that parents of some adult children are strongly suggesting that their children take advantage of the low cost of homeownership available today. Some moms and dads are helping financially and are even co-signing for the mortgage. Middle age parents who have owned a home understand its true value. A home has always been a good long term financial investment. However, homeownership also has many other benefits. In Fannie Mae’s most recent National Housing Survey, they asked the question directly:Is this a major reason to buy a home? The study broke up the answers into financial and non-financial reasons. The top four reasons and six of the top ten reasons were NON-FINANCIAL. The top four are below: Should this surprise us? Aren’t these the same reasons our parents bought their home? Aren’t these the same reasons we purchased our home? These are the same reasons parents have suggested their children buy a home. They want the same things for their grandchildren that they believed to be important for their children. And today, the cost of homeownership is at all time lows: “The numbers on housing have an important message for American families today, and particularly younger families setting out on life’s great adventure: Five years ago, at the peak of the home-buying euphoria, it was emphatically a time to rent. Today, when home ownership is depreciated more than ever before, the numbers tell us it is a time to buy.” “[S]omeone who plans on staying put for seven years would come out ahead by about $9,000 if they bought a median-priced home rather than being a tenant in a median-priced rental.” “Homes today are more affordable for average families than they have been since 1971. Median-income families today have nearly double the funds needed to purchase the average home.” Now that the economy is beginning to show signs of stabilizing, people are getting back to the core values that families have always embraced. Homeownership is definitely high on that list. And today, from a financial standpoint, it may be the opportunity of a lifetime.
We have reported that almost six million adults between the ages of 25 to 34 are currently living with their parents. That number reflects an almost 50% increase since 2003. These young adults are now being advised to jump into homeownership.
Bottom Line
Today, we are honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/. - The KCM Crew Additional evidence indicating that homeownership is really a savings vehicle is provided when Beracha and Johnson’s Buy vs. Rent model[ii] is employed to estimate the probability that renting is the superior economic decision and leads to greater wealth.[iii] In particular, Beracha and Johnson balance the benefits of ownership against the costs of homeownership and compare wealth accumulation through home equity against wealth accumulation through investments created by a comparable renter.[iv] The model assumes an eight year holding period.[v] Through thousands of Monte Carlo simulations (an advanced statistical technique where past outcomes are used to predict future results), Beracha and Johnson are able to derive the probability that renting will outperform homeownership in terms of wealth accumulation for each of the 30 plus years of the study. When the probability for a given year is 50%, there is no clear winner between ownership and renting. When the probability is greater than 50%, renting wins. When the probability is less than 50%, ownership wins. The results are presented in the graph below: The top line in RED depicts the probability that renting will outperform ownership in wealth accumulation assuming that renters reinvest rent savings (difference between rent payments and mortgage payments). Clearly, over the vast majority of the study period and under this very strict assumption of reinvestment of rent savings, renting provides the greater probability of wealth accumulation. The bottom line in BLUE, however, depicts a different and perhaps more realistic outcome. In particular, when renters are not forced to save and reinvest their rent savings and are instead allowed to spend on consumption, ownership becomes the probability winner in all of the wealth accumulation races. Implications Evidence is continuing to mount that renting is a better path to wealth accumulation in a strict “horserace” between buying and renting where renters are forced to reinvest any rent savings. Therefore, for those that have the discipline to monastically reinvest rent savings, renting is probably the better path to wealth accumulation. However, in perhaps a more realistic setting where renters can spend on consumption (beer, cookies, education, healthcare, etc.), ownership is the clear winner in wealth accumulation. Said another way, homeownership is a self-imposed savings plan on the part of those that choose to own. [i] Eli Beracha and Ken H. Johnson, 2012, Beer and Cookies Impact on Homeowners’ Wealth Accumulation, ongoing research. [ii] Eli Beracha and Ken H. Johnson, 2012, Lessons from Over 30 Years of Buy Versus Rent Decisions: Is the American Dream Always Wise? Forthcoming in Real Estate Economics. [iii] The model results simply need to be inverted in order to interpret the results as to when buying leads to greater wealth accumulation. [iv] See Beracha and Johnson (2012) for exacting details of their Buy vs. Rent model. [v] The holding period can be varied with little change to the results. This issue will be addressed in future postings.
Last week’s posting (Creating Wealth Through Homeownership – The Proof) concentrated on how homeowners, on average, accumulate more wealth than renters. The gist of the posting was that, in an environment where most do not save, homeownership creates a “forced piggybank” for owners through amortization of their mortgages and prepayment of principal. This conclusion comes from ongoing research being conducted by Beracha and Johnson.[i]
Such a situation occurred this week. Debbie Bosanek, Warren Buffet’s secretary of 37 years, recently purchased a second home in Surprise, Arizona. In an article in the Omaha World Herald, Mrs. Bosanek discussed her reasons for purchasing a second home and the personal advice she received from Mr. Buffet. “I just thought it was time to buy a home. Warren tells me that it will be the best opportunity in my lifetime. Mortgage rates are low and prices have dropped dramatically…I share Warren’s view about the future of America, and we believe that our country will do just fine. I’m happy to make this investment.” The greatest investor of the last century privately has told the people closest to him that buying a home right now “will be the best opportunity in [their] lifetime”. That’s good enough for us. How about you?
Warren Buffet is seen by many as the greatest investor of our time. When he speaks, people listen. Like anyone else in his position of influence, he is criticized by some for using his bullhorn to promote his own business agendas at times. That makes it very interesting when we occasionally learn of how heprivately advises those closest to him.
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