Is Buying a New Home Loan A Good Investment

Is Buying a New Home Loan A Good Investment

“It is as safe as houses”. We have all heard the expression or at least the concept that investing in houses is the safest way to making a fortune. We can all think of an entrepreneur that has made unbelievable amounts of money investing wisely in Real Estate. So, the question of if investing in Real Estate makes sense might seem unnecessary. Or is it?

The Wall Street Journal came up recently with a study that analyzed the performance of the Real Estate by having a look at the Case-Schiller index of 10 major cities since 1987. How did Real Estate perform? Not very well. The study shows that Real Estate provided only a 4.1% a year return. If you (as you must) factor in inflation (the rise in the cost ofthings and therefore an index of the loss of purchasing power) which rose by 3% a year, you are left with a real yearly return of 1.15%. Not very good for a supposedly good investment.

You might say this is not a good analysis of the data because it starts at the peak of a Real  Estate boom in the late eighty’s and finishes in the current slump. That is a good point, let’s have a look at performance from the mid 90’s when the price of housing hit record low prices. The yearly return is not evern 5% at 4.7% with an inflation of 2.5% to take into account.

As investments go this is not something you want to settle for. You might say that, ok it is not very exciting form of investment but at least it is safe. But is it really? Most of us can’t choose exactly when to buy or sell and you can be locked in a buyer’s market for years while your money is trapped in a property when it could be making a nice profit elsewhere.
You want safe? Why not think of inflation protected Government bonds. They do a lot  better than 2.2% real return. What is worse, that is not the whole story, home ownership comes at a cost. Some calculate these costs at around 2% (according to the same Wall Street Journal study) a year, which completely destroys your profit margin. The only real return most people receive from their home is the saving in rent money during the time they own and live in the house.

What does this study foretell for the future from analyzing past trends. Well despite the deep crisis the Real Estate is immersed in it is by no means the worst it has been. In fact if past crisis are anything to go by it has to get a whole lot worse before it starts to get better.

The best advice if you are set to invest in a house is to buy a home you like living in. The intrinsic value of enjoying living somewhere can be priceless and it will guarantee your will stay there longer maximizing the savings on not having to move from rental to rental and the costs that includes.