…Home ownership is regarded as some sort of Holy Grail of financial planning… based upon the conventional belief that owning real estate is the #1 path to (at least) financial security – if not affluence – but is there really substance to this belief? This article says, “No, not today” and explains why.
Residential real estate in Manhattan is arguably among the most coveted real estate in the world. It is a small island, in the commercial heart of one of the world’s largest, most affluent, and most powerful cities so, obviously,
investing in Manhattan real estate is a great investment, right? If someone bought some residential real estate in Manhattan 100 years ago, they would have made a fortune on it by today, right? Wrong!…
…In other words, net of taxes, the Manhattan real estate-holder would be significantly worse off financially than the gold-holder, and that is a best-case scenario: buying the most-coveted real estate on the planet and paying cash for it.
The vast majority of real estate that is being bought today (at record prices) is not coveted nearly as much as Manhattan real estate and the vast majority of home-buyers can’t pay cash for their properties. They take out large mortgages so, by the time the average purchaser is finished paying off their mortgage, they will have spent anywhere from two to four times the original purchase price – when interest and other charges are included. If buying the best real estate on Earth for cash (the original purchase price) is not a great investment, then what kind of investment are you getting paying two to four times the purchase price – for less valuable land? Not a very good one.
The obvious rebuttal from a homebuyer looking to live in the real estate unit that they purchase is that real estate is a great investment because they can deduct what they would have otherwise been forced to spend on rent from the cost of their home (including interest), but does it hold water? Well, at one time, when real estate prices were rational/reasonable and the supply of real estate was finite, disciplined homeowners could make home-buying a successful financial strategy but those days are long gone. Today, prices are not merely at all-time highs, they are at absurd, bubble extremes…
In this market, first-time buyers are forced to take on huge mortgages…[and, as a result,] any investment return in such a real estate purchase is eaten up long before 30 years (or even 20 years) of mortgage interest is added to the (record) purchase price of the house – along with the property taxes and upkeep that are required during the term of the mortgage – and that is if, somehow, the largest/most-unstable real estate bubble in history doesn’t collapse.
Real estate makes little sense (and cents) as an investment even for homebuyers planning on living on/in their real estate…Today, real estate, even in a prime market, is not a good investment. It is a wealth-trap, pure and simple. Grossly excessive prices combined with grossly excessive supply is a recipe for investment disaster and this bubble has been pumped up to insane extremes by the longest stretch of record-low interest rates in history.
What about the future?
Well, prices cannot possibly be sustained this high over the longer term and interest rates cannot possibly be sustained this low…[so,] when these market turn and interest rates start to normalize [we can expect to have a] crash unlike anything seen in the history of real estate markets, and, for people who don’t want to gamble their financial future in the real estate casino, they have an obvious choice: gold.
What is the best way to become wealthy today? Buy real estate and hope that (somehow) the bubble doesn’t burst? No. Rent and invest in gold. As 100 years of history clearly shows, real estate is not “as good as gold”.
Editor’s Note: The original post by Jeff Nielson has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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