Why home ownership makes sense in the USA?
I am an immigrant and trying to understand why home ownership makes sense here. There are no unions and no job security in the USA. Especially, in the tech sector besides very select few companies, the volatility is extremely high. I see a lot of folks saving for down payment for multiple years and still buying 10-20 year old houses. If you have family and kids it makes sense. Still, do people not think 3bhk apartment would be better choice compared to the house? I can't decide if I should buy and be on hook for next 30 years or wait for next downturn to buy. Even if there is downturn, I feel that number of people waiting to buy are too high and a lot of people are hoarding cash or cash equivalents this time. Thoughts?
it’s investment and ROI is high if you get it right. plus if you are good at airbnb it’s extra income. My friend do that. I don’t like him because he’s greedy but it works, for him at least. The monthly return is larger than his pay check.
You’re not “on the hook for 30 years”. You can sell whenever you want. Homes are investments. After two years, you don’t pay any gains tax on the profits. In a hot market like Seattle or SF, you can easily double your down payment money in a few years. You aren’t doing this if you pay rent.
People buy homes for stability and sense of ownership. You can make changes to the home, and you never have to move (unless you want to). Your monthly payment will stay the same for a really long time. Is there a risk that you will lose your job and can't afford the payment? Sure, but this applies to rent too. It's worse for ownership only if you bought a house you cannot afford in the first place.
The US has an over-valued housing market due to 1) public policy, 2) financial markets. 1) Public policy: most mortgages are effectively backed by the US government, via Fannie Mae and Freddie Mac. This is one effect of decades of public policy that favored American home ownership as the fulfillment of the “American Dream” and our support of the middle class. This support, however, is declining and will likely shift in the coming years. There is strong interest in doing away with the government guarantees, as this is not sustainable. 2) Financial Markets: the US consumer finance industry has a very unique and innovative product called the “30 year fixed mortgage”. Most countries do not have loan package products with such ridiculously long durations as 30 years. The longer the duration, the higher value home you can purchase. As Americans have over decades defaulted to utilizing the “30 year fixed”, home values shot up dramatically. I liken this to American obsession with diamond engagement rings, a completely financially irrational and constructed value. As Americans become more financially savvy, more people will question defaulting to 30 year fixed. 3) Financial Markets: America has also benefited from low interest rates due to ready access to eager buyers of treasuries and other debt products, especially from Japan and China. But as China develops its domestic consumer market to balance its dependence on exports, it will start to shift investment in US treasuries to building up the Yuan as the global currency and store of value. This means that long term interest rates are likely to be higher than the past few decades. This will also depress home values.
Summary: US home values are way over valued relative to other markets. This is due to the unique public policy, national values, financial illiteracy and low interest rates America enjoyed in past few decades. All those key factors are now transitioning to the inverse. Which will drive down home price appreciation going forward.
Even if you look at homes in Palo Alto from bottom of 2008 market downturn to today’s value (2018), investing in US index funds pretty much gets you the same value growth appreciation. Treating Real Estate as an investment is a losing proposition, unless you think you can repeat Palo Alto 2008-2018.
10-20 year old houses are usually in very good shape in the US. People maintain and repair their homes and construction quality is better than most of the other countries I’ve been.
US construction is terrible compared to other 1st world countries. Maybe even the worst. We’re obsessed with building houses out of skimpy 2x4s and then wonder why we’re unable to cope with hurricanes. Some exceptions apply, but masonry should be favored over timber for long term construction.
I think buying an home on USA makes sense due to all the above aspects but if you are an immigrant who anticipate Visa issues, I would probably stay away from the place if you do not have certainty. Not all immigrants face that risk and if you don't have that risk I would say it makes sense to buy a home here.
Don't underestimate the power of leveraged money. In stock market you invest 20k and get on average 8% return. In real estate you put 20k down on a 100k home and see a 4-5% gain on the 100k. So 1600 for the stock market or 4000 for the house. Plus you get to deduct interest and don't pay capital gains taxes when selling the house (if it's a primary residence)
To those who are saying housing is expensive in the USA (except Bay Area) look at comparative pricing in Europe, Asia or even just Canada as compared to local incomes. I wonder how those people afford houses with those income levels. USA houses are cheap, but that does not mean your primary residence is investment. An investment by definition is liquid, what would you do if you sold the home you and your family live in? Going back to renting is almost always impractical.
Because government subsidies and tax policies encourage ownership of suburban McMansions instead of renting. Let me know when I can deduct some of the cost of renting on my taxes vs. mortgage interest. Up until recently people living in high property tax states could deduct the entire cost of their state property taxes from federal income taxes.
With no rent control in a lot of areas I want to live in, I decided to buy a house just so I can lock down a frozen rent rate for the next thirty years. I’m in CA too where Prop 13 freezes my tax liability too
Agree. However that limits your ability to be flexible about where you are working? If you are staying in SJ, you will never consider opportunities in SF.
There are busloads of people who move between SJ and SF. Which begets the question name the great companies operating out of SF.