The Housing Market is Not Another Dot-Com Bubble

The Housing Market is Not Another Dot-Com Bubble
	Posted April 10, 2008
	The 1990s gave birth to hundreds of Internet-based companies, popularly known as dot-coms. Some dot-coms had good ideas and matured into strong, successful companies. But many did not. In too many cases, the business plan was simply to start a company and sell it to someone else—which could be immensely profitable if delusional investors could be found, but a disaster otherwise. The tech-heavy NASDAQ index increased by more than 40 percent a year between 1995 and 2000. Dot-com entrepreneurs and shareholders were getting rich and they wanted to believe that it would never end. But end it did, with the NASDAQ falling by 75% between 2000 and 2003 and the Internet Index falling by almost 95%. That was a bubble. The housing market is quite different. When real investors, like Warren Buffett, buy something, it is not because they expect the price to be higher tomorrow than it is today, but because they expect the income from their investment to provide a good return. If you can buy a stock for $100 that pays a $10 dividend every year, forever, you don’t have to sell the stock for $200 for this to be a good investment. Flimsy dot-com stocks were bad investments because there was no income at all. What is the income from your home? If you are a landlord who rents a home to someone else, the income is obvious—the rent check you get each month from your tenants. If you own a home and live in it, your income is the rent check you don’t have to give to someone else. When you write a rent check for $1,500, this money goes out of your bank account and into your landlord’s bank account. If you own your home, the $1,500 doesn’t leave your bank account. This $1,500 is not an abstract theoretical $1,500. It is a real $1,500 that you can invest or use for food, clothing, and entertainment. This $1,500 is income from your home. The purchase of a home is the most significant investment decision confronting nearly all adults. Yet sound advice, untainted by the self-interest of real estate and mortgage brokers, is extremely scarce. In Houseconomics, the Smiths provide simple and understandable answers to the vexing questions surrounding home ownership, making it a valuable resource for anyone serious about their financial future. Of course, there are other financial benefits from home ownership (including the tax deductibility of your interest payments and property taxes), and there are also expenses associated with owning a home (including the monthly mortgage payments, property taxes, and maintenance). The point is that the investment value of a home depends on its income—the rent savings and other benefits net of the mortgage payment and other expenses. Because this income is as real as the dividends from a stock portfolio, we call it your home dividend. Home prices won’t ever collapse the way the prices of dot-com stock plummeted because homes are fundamentally different from dot-com stocks. When the prices of dot-com stocks started falling, there was no longer any reason to buy them. If home prices fell dramatically, you would have a very good reason to buy a home—to get the home dividends! Like many a great investor has said, if you like a stock at $50, you will love it at $40. If you like a home at $300,000, you will love it at $200,000. We are convinced that real estate continues to be one of the most appealing ways for you to achieve financial security and, along the way, to enjoy—indeed love—your investment in ways that you could never love stocks, bonds, and bank accounts. Build up equity in your home and invest your home dividends wisely. If you do, your home will be the best investment you will ever make.
	Posted By  Margaret and Gary Smith
	1 Comment - Post Comment
1 Comment >> I bought my first home 40 years ago. It was definitely the best investment I ever made!   Commented By MaryBarnes - May 26, 2008