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real estate

A House Is Just a Home

Unlike carefully selected stocks and bonds, a home should not be regarded as an investment.

Nothing is more disillusioning than finding out that a beloved hero isn't perfect. The revelation can cause you to swing from adulation to scorn, when in truth, your former idol still has plenty of admirable traits. The problem lies not with the object of your infatuation, but with your own unreasonable expectations.

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So it is today with that great fallen idol of American financial security, homeownership. Until three years ago, owning a home was canonized as the indispensable building block of personal wealth. Many people assumed, incorrectly, that homes and condos had outperformed other asset classes for decades all over America. Therefore, you couldn't buy too much home for your family's needs, stretch too far for that mortgage payment, or overimprove your residence. A rising market would soon make you look smart.

I remember what one middle-aged woman told me in 2006, when I asked her how much of her current income she was saving for retirement: "I don't need to save anything. My home will keep appreciating 10% a year, and when it's time to sell it and retire, I'll be able to live off the equity."

Four years later, several trillion dollars of home equity has evaporated in the worst residential real estate slump since the Great Depression. And some people are swearing off homeownership forever. But in their disillusionment at discovering the pitfalls of homeownership -- and there have always been several -- they are blinded to its benefits.

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Not an investment. A recent cover story in Time, subtitled "The Case Against Homeownership," described it as an American "fetish," hyped by real estate agents, suburban planners and developers, homebuilders, and, yes, homeowners themselves.

Here at Kiplinger, however, we didn't drink the Kool-Aid. We've always noted that owning a home isn't for everyone, and not at every stage of life. Owning a home can limit career mobility, and if you move around a lot because of your job, renting is probably better -- especially for young adults who haven't decided where they want to put down roots. Ditto for anyone with a shaky employment situation. Not handy with a hammer and paintbrush? You won't enjoy home maintenance.

Similarly, we've always warned our readers against borrowing so much for a home that they don't have enough left over to fund their savings for other needs -- a job layoff or another emergency, college for the kids, or retirement. And we raised red flags about the cash-out-refinancing craze, which ruined many homeowners -- and fueled America's overconsumption binge in the past decade.

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Unlike carefully selected stocks, bonds and real estate investment trusts, a home should not be regarded as an investment. During the housing bubble, I noted that in most parts of the country, the typical American home had simply kept pace with inflation over many years -- not bad for a place to live, but not a solid investment. The once-dazzling appreciation of homes in metro areas on the coasts -- many California cities, New York City, Washington, D.C., Miami -- was the exception, not the rule.

But if all these caveats are heeded, homeownership still makes sense. The ability to deduct mortgage interest and property taxes is the last great tax shelter, and you get a tax break on a large part of the profits when you sell. If you borrow at today's super-low fixed rates, your principal and interest will never rise -- which can't be said about rent. And the principal you pay each month is systematic savings.

After recent price drops, homes are more affordable for middle-income buyers than they have been for many years. With your expectations duly tempered -- think zero inflation-adjusted price appreciation -- go ahead and buy. In a few years, you just might be pleasantly surprised.

Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.

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