Is a house still a good investment?

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Host: Mortgage rates. I know, they're not cute. Very ugly right now. Hey, I'm John Quint Hill, and this is Explain It To Me, the show where you call 1-800-618-8545, and we find the answers to the questions that matter most to you. Miranda hails from the Twin Cities and called in with a question that's on more than a few people's minds. Is it worth it to buy a house? I think that's always been the go-to investment for past generations of you buy a house and that's kind of your retirement plan. And that just doesn't seem realistic or even attainable to buy a house. So it's like, should I even try to do it? Is that something I should do?

Host: This is a question I've wondered about, too. OK, I'm going to be honest. I love to scroll through real estate websites. But should we be buying homes? Given the economy and the interest rates, it can often feel like a fantasy. The market is just so much more different than it was when our parents were looking for starter homes. Is this really where our money should be going? To get an answer, I called up James Rodriguez, senior real estate reporter at Business Insider.

James Rodriguez: Do you ever just like scroll through Zillow dreaming of what it would be like to own your own home? Or am I telling on myself? Not at all. I do that all the time.

Host: The conventional wisdom is that buying a home is the way to build wealth in here in America. Is that true? Has that ever been true?

James Rodriguez: Definitely with past generations, and I think especially has this hold on people today when they've seen especially baby boomers who may have bought homes decades ago and have reaped all the rewards from this really crazy moment in the housing market where prices jumped so substantially during the pandemic. If you compare the end of 2019 to the beginning of this year, home prices are up about 50%. So historically, we have seen people invest a lot in their homes. And for some people, it is absolutely true that they have reaped substantial rewards.

Host: I want to talk a little bit about why that conventional wisdom around home buying and building wealth isn't hitting quite like it used to. What's different for today's homebuyers?

James Rodriguez: I think we just see the affordability aspect. People are stretched so thin budget wise. The majority of middle class Americans say that they are struggling financially. Their financial stress has increased since before the COVID-19 pandemic began. So when you look at inflation, economic instability, a lack of savings, all of these have increased the share of Americans feeling financially stressed. Mortgage rates, they went super low during the pandemic. They were at record lows and that allowed people to get in because even if prices were rising, the rate on their loan was so low that you could kind of stomach the monthly payments and make it work. Whereas now we've seen mortgage rates rise to more than double those levels. And home prices haven't really stopped climbing, especially in areas where there's still not a lot of homes on the market.

Host: Is this the case in particular for Zoomers and millennials who are looking to buy homes in their 20s and 30s? Like, it just feels so, like, I don't know. I just think of, oh, baby boomers, they got to get their house for like $5. and now the rest of us have been priced out and they're aging in place. Like there's just so much.

James Rodriguez: It is easy to blame baby boomers, especially when they've been so fortunate in the housing market at large. But I think one of the things you have to think about too is the demographic side of things. And we had this huge wave of millennials, currently the largest living generation in the US, We knew that they were going to be hitting their prime home buying years around the turn of the decade, 2010s going into 2020. And there was just not enough building happening after the Great Recession to keep up with all of that demand that was on the horizon.

Host: A report released today by the National Association of Realtors paints a picture with housing data. The Great Recession hits. Employment there fell 1.5 million. We have not recovered that over all these years. We are still short of around 500,000 workers in construction.

James Rodriguez: Another reason why you saw home prices rise so dramatically is not only were millennials competing against their generation, but they were also competing against baby boomers in the market who had cash, who had substantial savings, and were able to, in a lot of cases, bid up home prices. And we're seeing, as you mentioned, baby boomers staying in their homes longer than ever. But eventually they will be aging out of the market which is kind of a euphemistic way of saying dying And when you look ahead to that and substantially less people competing for homes in the U you see household growth slowing down as well more deaths from boomers combined with lower birth rates over the next couple of decades. And all that equates to weaker demand for homes going from 2030 through 2040.

Host: Yeah, can you sort of run through kind of what the home buying experience and, you know, growth has been like from the boomer side and then sort of compare it to how it goes now.

James Rodriguez: Yeah. So you think of a baby boomer who maybe they bought a home in 1994 and they hold on to it for the life of their mortgage for 30 years. And then they sold last year for, if you look at typical home price increases, a 305% gain. So So that's, you know, say they bought a $300,000 home, it's worth more than a million dollars by the time they sell it. Ooh, okay. You can retire with that. It's a crazy return. It's really mind-boggling to think about.

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Host: We're back. It's Explained It To Me. And we're talking about whether it's a good idea to buy a house these days. It's 2025 and climate change is definitely a factor. So I called up Dr. Jeremy Porter. He heads up research into housing and climate for First Street. They analyzed the climate risk of homes and shared that analysis with websites like Zillow and Redfin.

Dr. Jeremy Porter: It really is the point at which your standard American feels climate change. I mean, we're seeing that there's more hurricanes. Breaking news, hurricane barrels slamming Texas, making landfall just a few hours ago. Francine is now a hurricane in the Gulf of Mexico heading for Louisiana. Whipping winds, torrential downpours, and communities submerged. Hurricane Debbie wreaking havoc across the coast. This is the city of Asheville in the western mountains of North Carolina, 2,000 feet above sea level and hundreds of miles away from the nearest coastline. But such was the force of Hurricane Helene. We're seeing that there's more extreme precipitation events. What we saw in L.A. is that there's more wildfires, more severe wildfires than we've seen in the past. But the way that it's affecting individuals is that we're seeing more property damage, more people be impacted by these events directly to their properties or to their communities.

Host: Fear and concern is growing tonight as flames light up the Los Angeles hillsides. Firefighters are scrambling to contain several major fires tonight. Just into our newsroom, we are learning of another fire erupting this time in Sylmar in the San Fernando Valley. Overnight, catastrophic damage reported as severe storms slammed the central U.S. A tornado emergency in northeastern Arkansas. Powerful twisters destroying homes. In Missouri, an EF1 tornado, winds nearing 100 miles an hour, causing widespread destruction in the town of Nevada. Homes and businesses reduced to rubble.

Dr. Jeremy Porter: Lots of times people live in places like Miami or they live in Houston and they'll say, oh, you know, the weather's always been like this in the area that I'm at. And they'll say, well, what about insurance? And they'll say, well, insurance is killing me. And lots of times people won't make the connection that the reason insurance is spiking is because there's more damages and there's more payouts from the insurance companies.

Host: Our caller is in her late 20s, Miranda. She lives in the Twin Cities, and she's considering whether buying a house is the right decision for her. What would you say to someone like her?

Dr. Jeremy Porter: I think we're at a point at which we finally have data to help make decisions like this. And I think one of the biggest problems that we seen so far in the way that climate and real estate are being covered is that climate driving down the value of home prices It sort of reversing the trend that we've had in the U.S. for a century where the American dream was owning a property and people have aspired to do that. I think what we're seeing, though, is that there's a lot more nuance to the decision-making process than simply avoiding homeownership because of climate risk.

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Host: We're back. This is Explain It To Me. And I was super excited to get to call up our next guest. Hey, I'm Mandy Woodruff-Santos, and my podcast is called Brown Ambition.

Mandy Woodruff-Santos: Okay, so I have to admit, I am a Brown Ambition listener. You know, I'm trying to get my big girl finances in order. So I'm very happy to be talking with you today about home ownership, which feels like one of the big girl finance things.

Host: Yeah, it sure is, isn't it? I mean, at least that's what society wants us to think. Gotta get a Birkin, gotta get a home. Big Birkin, big, whole five, six, big-ish.

Mandy Woodruff-Santos: Are you a homeowner?

Host: I am Yeah I am I bought my house in 2018 which feels like a thousand years ago This is pre pre And at the time our total mortgage which included property tax and the actual loan monthly principal that we were paying was about That increased a thousand bucks since then So now I spending So nearly Oh my gosh And I like oh I reminded Oh yeah that why I always feel broke

Mandy Woodruff-Santos: Yeah, it's interesting. This question we got jumped out to me because it's one that I have too. So I'm a renter and I have a lot of friends who have bought or just starting to buy. And I admit that I have not completely given up a little bit of a dream of owning a sexy condo in the city. Like that is how I see. I don't know if I like I'm not trying to have a yard or anything, but, you know, I could I could live in a condo.

Host: Yards are overrated.

Mandy Woodruff-Santos: Yeah. And we've been told for years that buying a home is this important milestone for adulthood. And, you know, it's this first step to building equity and wealth and generational wealth. I wonder what you make of the question from our listener. Like, should she buy a house? Is this something she should be working towards?

Host: There's all sorts of like different trains of thought about is it a good investment to buy a house? and I think you have to understand why you're buying a house. Are you buying a house for your family to live in for the next 10 plus years? That's a very different equation to me than are you buying a home that you're hoping to fix up, flip on the market in a year or two?

Mandy Woodruff-Santos: Now, if you really want to buy a house and it is your dream and you love everything that you understand what goes into it, you understand, listen, I didn't understand how much property taxes could be. I thought my mortgage was just going to be my mortgage, but you add in property taxes, it just about doubled it, which was crazy to me. If you understand maintenance, if you understand how property values can, yes, typically they do go up, but how they can be impacted by things like development and by weather patterns, like global warming is real. If you understand all these things and you still really want to buy a house, then yeah, go get your house.

Host: The ultimate thing is can you afford it? Of course, mortgage rates. I know they're not cute, right? At all. Very ugly right now to me. But they're not as ugly as they could be. Like in the 80s, you know, people were just walking out the door with like double digit interest rates like it was nothing. That was like the norm, right? So they're not great, but they're not the worst they've ever been.

Mandy Woodruff-Santos: What's more difficult these days is inventory. What I wouldn't do today is because there's such like a dearth of good properties on the market, I wouldn't just buy whatever's there just because you want to buy something. Like, I got to get it. You know, I would, if you can, wait, wait until you find a home that you really like, that fits all your needs. It's worth it.

Host: Yeah. So if you sit down and you go through these numbers, you do the checklist, you find out where you are emotionally lifestyle and you're like, okay, buying a house, that is for me, that is what I want to do. what are the first steps what do you suggest that a person do look at your credit score because your credit score is going to determine how expensive that mortgage is going to be and like we're assuming right that people are going to be taking out a mortgage if you got cashed by a house that's a whole other conversation like you're a different person than we talking about right now you want to avoid making any big taking out additional loans um six months before you're going to apply for a mortgage because mortgage lenders don't like to see new debt right before they're going to potentially approve you for a loan.

Mandy Woodruff-Santos: Ideally, you're not going to have a fluctuation in income, like household income. So you want to save up for that down payment, of course, but also think about also saving up for a few months of your household income just to have it on the side. Another thing to consider is how much do you want to put down for your down payment? There are, if you're a first-time homebuyer, I would absolutely spend time researching first-time homebuyer programs. There are some through the federal government.

Host: Look at your monthly income. Look at it, guys. Post tax. And look at maybe 25 to 35 percent of it. If you live in a more high cost area, it just may be more realistic to look at that like, you know, 30 to 40 percent range and even up to 50 percent. And that's what I would cap your monthly housing expenses at.

Mandy Woodruff-Santos: The worst thing you can do is buy a property and then end up getting into it. And all your bills start hitting and you're like, wait, what? Right? Like, how am I supposed to afford all of this? And then you're stopping investing. You're stopping, you know, contributing to your savings account. And debt starts getting not paid back. And then you're just in a real difficult position.

Host: That's if you want to buy a home but say you can't buy a house or you know there are some of us who just don't want to how do you build that equity because homeownership is kind of raised as this this is how you do it this is how you get a net worth this is how you do xyz what if you don't want to buy into that what can you do oh you get some bitcoin obviously no just kidding duh um no listen home ownership yes a home can be a vessel for you know increasing equity and building wealth and that's true but it is not the only game in town like ever heard of index funds mutual funds you should be investing through your 401k and in fact like you no one can predict the market right no one can predict i could not have predicted that i would have bought one of the last homes and this it feels like that because there's such low inventory where I am and so yes my my home value has gone up something nuts I don't even I think my house was valued at 400 we bought it for 445 now it's worth like 700,000 or something wow it's not though like I don't know people be buying houses out here for way too much money I just can't you will not catch me dropping 700k You should see what a million dollar home is these days. It is depressing.

Mandy Woodruff-Santos: Yeah, yeah. So you can absolutely invest in the stock market, invest through your 401k, max out your Roth IRA, invest in yourself. Can we make that normal again? And I don't mean go get a brand new degree. I mean, what do you value in life? Do those things.

Host: One of the myths that I kind of fell into when I became a homeowner was that you would have these tax benefits of being a homeowner. That really changed with the 2017 jobs tax and jobs cut act, whatever Trump put in effect back then. And like the amount that you can actually get, you know, how much you can reduce your taxable income as a homeowner has gotten a lot less attractive.

Mandy Woodruff-Santos: I haven't the most tax breaks I've gotten is when I opened my LLC. And I'm not trying to sugarcoat the entrepreneur lifestyle. It ain't for everybody. But when I say invest in yourself, maybe it's investing in a business idea that you have. Who's to say that your business, you know, if it's a if it does well, that it couldn't do better on the return on investment than a home. Who knows?

Host: You can find her on her podcast, Brown Ambition. We're working on a show about what to do after you graduate. If you're in middle school or high school and have thoughts about what you want to do after you get your diploma, give us a call. 1-800-618-8545.

Host: This episode was produced by Hady Mawajdeh and Carla Javier. It was edited by Miranda Kennedy, fact checked by Melissa Hirsch, engineered by Andrea Kristinsdottir and hosted by Jonquilyn Hill. Photo by PATRICK T. FALLON/AFP via Getty Images.