Overrated: Home ownership advantages wane in down market


Anytime that something is nationally recognized as "The American Dream", there's a good chance that it's overrated.

In the midst of record foreclosures, and plummeting home values leaving people upside down on their mortgages (i.e. they owe more than the home is currently worth), the American Dream has turned into the American Nightmare for too many families.

But let's not write the elegy for homeownership just yet: the reality is that a home is the best investment most people will ever make and, according to a 2004 Federal Reserve study, the average renter had a net worth of $4,000 while the average homeowner's net worth was $184,000 -- homeowners are 46 times richer than renters.

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It's likely that that gap is smaller because of widespread declines in home values but, long-term, most people who want to be financially secure should look into owning their own homes. But in order for a home to be a good investment, it has to make sense. Here's how you can tell if it makes sense:

  • Is it cheaper, or at least comparable to, renting? Add up monthly mortgage costs, taxes and other expenses on a home you're considering buying. If it ends up costing a lot more than you could rent something comparable for, there's a good chance you'll be better off continuing to rent and investing that extra cash. Don't forget to factor in the mortgage interest tax deduction.

  • Will you be staying there long enough to justify the expenditure of funds on closing costs and then commissions when you sell?

Homeownership is a wonderful thing, but it's not the free lunch that it was sold as in recent years.