Home Ownership Is Not Financial Security Assurance

Robert Bridges, a professor of clinical finance and business economics at the University of Southern California’s Marshall School of Business, published an opinion piece in the Wall Street Journal last week, in which he argued that “Today’s young people would be foolish to imitate their parents and view [home] ownership as the cornerstone of personal finance.”

In support of his thesis, Bridges offers compelling statistics which demonstrate that the return of investment on a home bought in 1980 is infinitely less than having applied that same amount of capital toward investment in the stock market. He writes that “a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.”

But instead of bemoaning the loss of home ownership as a path to financial security assurance, Bridges proposes that somewhere along the way, Americans got the wrong idea about the true purpose of acquiring residential property. In other words, we should buying homes to live in, not as a means to guarantee financial security: “Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.”

This is a misconception that according to Bridges, we as a society must rectify sooner rather than later. With unemployment sitting at nearly 10 percent and job growth progressing at an anemic pace, the focus should be on shoring up immediate security and planning for retirement, rather than chasing the American Dream of buying a home as a guarantee for lifetime solvency.

Bridges does not place blame for a misguided financial ideology squarely on the shoulders of consumers. Instead he says, “It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We’ve diverted capital from more productive investments and misallocated scarce public resources.”

That is a loaded indictment which asks us to take a new look at traditional economic indicators like new home construction numbers. Historically viewed as one of the economy’s most important vital signs, Bridges claims that these numbers are illusory:

“These positive effects are transitory, however, when local economies have insufficient permanent employment to justify a constant level of demand for new housing stock…By contrast, a business investment in the amount of the several hundred thousand dollars represented in the value of a house would likely create many permanent jobs and produce income, profits and competition. As with most things, the benefits of building new homes come with a sobering caveat: What becomes of the work force once the party is over?”

What do you think? Is Professor Bridges right? Has home ownership been mistakenly represented as the key to the retirement security kingdom?

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One Response to Home Ownership Is Not Financial Security Assurance

  1. Joe Wilson says:

    If our illusions “fostered misconceptions about homeownership and financial independence” does the Prof’s equation then become the relativly simple cost-basis analysis of rent vs. own? Not sure where he wants me to go with this.

    And if the answer falls (temporarily) on the side of “rent,” what should be done when the numbers swing, as they surely will, to benefit “own”?

    If home ownership has been relatively unrewarding (financially), market timing has been disastrous for those without a crystal ball.

    Finally, while home ownership is not a good “investment” (vs. stock equities), doesn’t it offer a form of security, especially for those of us who are over the hill? Doesn’t owning a home, mortgaged or not, give stability and, when the mortgage is paid, security (so long as taxes, insurance, and maintenance don’t rocket)?

    If his argument is merely to encourage a realistic perspective rather than to imply a strategy, who could disagree?

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