Is Home Ownership Overrated? Taking A Second Look At The American Dream

As recently as 20 years ago, buying a home was seen as an important milestone on the road to economic independence. 

But a combination of high home prices and interest rates near 20-year highs have combined to create a new landscape for Americans who don't already own their homes. This begs the question: Is having a single-family home still worth the cost? Is it still the American dream? Investor Grant Nardone doesn't think so.

Times Have Changed For Homebuyers

The modern property market is perhaps as challenging for average American homebuyers as it has been since the Federal Housing Administration began insuring 30-year mortgages. For years, prices have been on a relentless rise in most of America's major cities. It's come to a point where the average home price in places like Los Angeles or San Francisco is more than $1 million.

It wasn't too long ago that you could buy a home for $1 million in exclusive California enclaves like Beverly Hills or Pacific Heights. Now it buys you a fixer-upper in an emerging neighborhood — if you're lucky. At first, the rise in prices wasn't felt so keenly because interest rates were in the low single digits. The cost was also offset by the fact that there was a good chance the value of the property would double roughly every 10 years.

Look At The Raw Cost Of Modern Home Ownership In Los Angeles

But now that the average interest rate is around 7%, the mathematics of a million-dollar house looks different. Look at an average home purchase for $1 million in Los Angeles County along with some of the expenses that will come with ownership and its eventual sale after a decade.

• $82,000 — 10 years of the current .082 property tax rate
• $20,000 — 10 years of maintenance at $2,000 per year
• $200,000 down payment
• $671,280 — 10 years of payments ($800,000 at 7.5% = $67,128/year x 10 years)

If you put 20% down, you won't have to pay property insurance. But realistically, would you risk the other $800,000? Probably not, so you can add the cost of insuring the property to your tally. This assumes you can find an insurance carrier — they are leaving California in droves.

More importantly for homeowners is that the only way it's going to make economic sense to sell the property in 10 years is if it's worth $2 million by then. But, what if it's not? What if the current high interest rates act as a glass ceiling on home prices and you can only sell your property for $1.2 million in 10 years? You would only recoup your down payment.

The money you spent on interest, property taxes, insurance and maintenance would all be lost unless you sold the property for $1.3 million. You will also have to pay your real estate agent 6% of the purchase price as a commission. In other words, this $1 million house is a losing deal for you at that number.

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What About The Sun Belt?

The example above is based on Los Angeles, one of America's most expensive housing markets. Many people have responded by moving into lower-priced Sun Belt cities in Florida, Texas and Arizona. This has resulted in a surge in property values in those markets that, when combined with the wage disparity between the West Coast and the Sun Belt, is creating affordability issues in the Sun Belt, too.

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Another rapidly developing issue for Sun Belt states like Florida is insurance costs. Major insurers have been leaving the state because the cost of replacing homes in areas frequently hit by hurricanes is outpacing insurance premiums. The rapid population growth in the Sun Belt is also straining the infrastructure in those states. Even in states with low or zero tax rates, municipal fees and other costs of development will be passed on to homeowners.

A Rapidly Shifting Paradigm In Life And Employment

In the original model of home ownership, people purchased a home, raised their family in that home and worked their entire career for the same company while paying off that home. By the time they retired, the home was paid off and they could live in relative comfort on their company pension.

If they needed money, they could easily borrow against the house. In many cases, they sold the house at a massive profit and used part of the proceeds to buy a condo in the Sun Belt. It was an idyllic way of life that for most people doesn't exist anymore. In today's fast-paced world, workers are rarely with the same company — or even in the same city — for 10 years, much less 30.

That means it's time to refigure how people look at home purchases and investing. The day may have come when purchasing a single-family home or condominium won't be the first rung on the ladder to financial independence but the last one. If people move every few years, and homes cost so much to buy, does it make sense to approach homebuying the same way that baby boomers did?

What's A Homebuyer Or Real Estate Investor To Do?

One of the most important skills in operating a sailboat is tacking — adjusting the boat's path to the wind. The boat has no external motor, which means the captain may have to tack northeast instead of due east because that's the direction the wind is blowing. Real estate and home investors can learn a lot from this lesson.

The residential real estate market has been getting progressively difficult for homebuyers for years, and that was before interest rates began rising. Rather than trying to sail into heavy winds and choppy waters, home investors may want to take a different tack. It used to be that people didn't begin investing in things like passive income opportunities until they had already purchased their home.

Now, home prices, mortgages and insurance are so costly that you may need passive income plus the money you earn from your job to buy one. For example, if you take the $200,000 that would have been a 20% down payment on a $1 million home and invest it in a real estate investment trust (REIT) whose assets grow at 7% per year for 10 years, your original investment would be worth $393,000 in addition to your dividends.

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Real Estate Offers A Variety Of Investment Sectors

Many analysts predict some difficulty for the real estate market. Of particular concern is the commercial office market, which is struggling with the one-two punch of low occupancy rates and high-interest rates. But it's only one of many sectors in the real estate market. Other REIT sectors to consider include:

• Farmland
• Industrial
• Data center
• Medical
• Government-leased property REITs
• Mixed use

There is risk involved with any of these investments. Although real estate has performed well historically, it is still possible for an investment to underperform or lose money. But saving your money to buy a single-family home and investing like it's still 1979 also comes with risk. Even if you try to do that, raising the money necessary to purchase a new home is still a daunting challenge.

Unless you are fortunate enough to be a high-wage earner, if you want to purchase real estate in today's market, you need to be discerning. Ask yourself whether it's worth it, and be flexible enough to adapt your approach. If you are committed to home ownership, more power to you. Just remember it's not the only way to invest in real estate, and you can still use real estate investing to get closer to the American dream.

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