Despite the housing bubble of the last few years, despite the overbuilding in Florida and other locations, this myth persists. It seems that no smart thinking person would adhere to it, but adhere they do. The myth trustees generally take the view that only some people are under water, only some people got involved with subprime mortgages and that their own home is in fact their best investment. “Just wait a year or two,” they like to say.
For the reader with a wider scope, we extended the myth to include land. In a knockoff of the myth, Will Rogers famously said, “Buy land; they a’int makin’ no more of it.”
In the interests of myth busting, it is our sworn duty to topple all myths. Let’s start with Will Rogers. If the focus were on agricultural land, he would be right. The value of farmland has tended to rise even through the recession. Over the last sixty years total return on US farmland has tracked the return on stocks. And, farm land avoids the volatility rattling the markets in recent years. This boosted gold’s hedge feature. However, agricultural land is not all the same. The black soil of the upper Midwest holds a timeless value that sneers at recessions, stock portfolios and gold. And well it should. America’s rich soil is among the most prolific in the world. In Iowa over the last year or so, land value has risen about 20% to an average around $7,000 an acre. The trend is global. The value of farmland ascends as world population and wealth rise. More people want more and better food.
By contrast, most farmland lacks the aura of that rich black soil. Dairy land, acreage populated by sheep, very dry or very wet land hold far less value as do the crops and animals such land supports. According to The Salt Lake Tribune, farmland prices have been falling in Utah where an acre goes for about $1,800.
As far as the ‘house is my best investment’ myth is concerned, and looking beyond the collapse of that once bristling market, the myth buster’s task is eased by the fact that a home is not a true investment. People only say that a home is an investment. Of course, the insistence is bolstered by decades of braggers wallowing in appreciation earned over a long period of time. The $200,000 home with a $100,000 mortgage soon becomes the $1,000,000 home with a $50,000 mortgage.
Yes, the rise in value is very nice. But, what will you do with the appreciation? Will you collect it and invest it? Or, perhaps spend it on a yacht, a house in the Caribbean and a ski lodge in Aspen? While the value of your starter home skyrocketed, homes in the places where the rich and famous cavort shot up as well. So, the $850,000 you “earned” on your home will not establish you as a modern-day Kennedy in West Palm Beach. In fact, if you want to sell your home and buy a home across the street, that home on the corner might be selling for $900,000. When you figure soft costs and moving costs, you would barely break even.
Ah, but the myth persists insidiously. You could, of course, take out a new mortgage for say $600,000, which includes the $50,000 left over from the first mortgage leaving $550,000 spending money. You will also acquire a much larger monthly mortgage bill. You could put aside $300,000 to help pay the new mortgage and have $250,000 to buy that vacation/retirement home.
A home in Florida might be delightful and since they overbuilt, there might be a bargain with your name on it. However, there are new taxes, repairs, upkeep and travel to consider. Will you have enough money to fly to Florida several times a year? Will you rent a car or leave one at your second home? And don’t forget insurance. All on $250,000?
Heard enough? Here’s a myth busting question to ask when your friends trot out this daydream: “If the market shoots up – or if it slumps like a North Korean missile – will you sell your home – your investment?” If a home really is an investment, the investor must be willing to either sell when he or she reaps a profit (“Buy low, sell high”) or when the bottom falls in. The investor who says he or she cannot sell under either of these extremes – and the market has lived on apex and nadir in the last decade – is not an investor but a homeowner. There is nothing wrong with being a homeowner. If your home is located on arable farmland – better yet on prime land in the upper Midwest — it would be your best investment. Otherwise, a homeowner is someone who lives in a home and invests in stocks, bonds, gold, art, etc.
Please send suggestions for more myth busting efforts. Here’s a thought: if you enjoy myths, wait until the election gets closer.
Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a financial consulting firm in New York City.