The real economics of homeownership

Cover image courtesy FT Press.

Book Review
Title: "Houseonomics: Why Owning a Home Is Still a Great Investment"
Authors: Gary N. Smith and Margaret H. Smith
Publisher: FT Press, 2008; 240 pages; $17.99 list ($14.03 on amazon.com)

Last week, I read a New York Times article that gave me pause. The premise was that many of the penny-pinching and belt-tightening measures Americans have implemented would stick around for a generation. The quote that caught my eye in particular was from a young, single female attorney, who expressed that the mortgage/housing/foreclosure crisis had changed her opinion that homeownership was an inherently valuable experience. She said that now she was OK with being a lifelong renter.

As a real estate broker, that comment was like a blow to my solar plexus.

But I understand her concern, and immediately thought, "Homeownership, as an American ideal, needs to step its game up and justify itself." Apparently, I was late. In their 2008 book, "Houseonomics: Why Owning a Home Is Still a Great Investment," Gary and Margaret Smith take on the express task of laying out their economic proofs that homeownership is a viable investment.

And they make a compelling case, in a format that readers will find easy to digest. Beyond simply presenting an argument, though, "Houseonomics" (so named to avoid the cooking/cleaning/sewing connotations of the term Home Economics) aims to provide a set of usable principles, tips and cautionary tales to help readers "make reasonable financial decisions about homeownership."

I appreciated that the Smiths, despite their professions as economist (George) and financial planner (Margaret), took the time to acknowledge and legitimize the non-economic (read: emotional) benefits of homeownership. Rather than arguing that "houseonomics" are more important than the warm-and-fuzzies you get from realizing the American Dream, the authors posit that they are simply to be considered at every decision point of the real estate ownership lifecycle, from buying, to selling, to financing and even maintaining and upgrading.

Even more boldly, the Smiths argue against the "your home is just a place to live" position publicized by Rich Kiyosaki in the real estate investment classic "Rich Dad, Poor Dad." They go so far as to propose that, with wise decision-making on houseonomic issues and avoiding a speculative, day trader's or flipper's mindset, the home you live in (vs. an investment property) can be an "engine to prosperity" and even serve as a profitable investment, which the Smiths call a House Retirement Account (HRA).

A central tool to the Smith's mission to transform all of our property ownership decisions into savvy investment strategies is their concept of the Home Dividend, a metric of how much "income" your home generates via saving you from having to pay rent (offset, obviously, by the tax-advantaged mortgage and other costs of homeownership).

While this sounds ridiculous at first glance, given that the costs of ownership are generally higher than the costs of renting, the cornerstone of the Smiths' argument is the less-obvious fact that rents increase steadily over the years while the mortgage payment on a "smart" loan is fixed -- meaning that with a fixed-rate mortgage, your "Home Dividend" -- the quantified economic advantage of homeownership -- should actually go up over time.

After exploring the Home Dividend concept, the Smiths use it and other insights to directly address questions of pressing concern for today's homebuyers and owners, like whether to time the market, negotiation strategies for homebuying, how to choose a mortgage, and when and how to pay for remodeling.

While some of their assumptions and strategies in this latter part of the book are outdated or overly general (e.g., that sales prices of sold properties are available only to real estate agents -- in light of sites like Zillow and Cyberhomes, this is clearly no longer the case), overall "Houseonomics" provides useful strategies and decision-rules for the financial side of your real estate decisions.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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