Most people dream of owning a home. The middle class is more likely to invest in housing than the rest. The middle class rarely invests in the stock market. However, most middle-class Americans and people around the world own tulum real estate. Real estate is not something that people buy outright. They instead borrow money to buy the property. This investment decision has a huge impact on their lives. The term “house poor” is used in America. The term “house poor” refers to people who make decent money. They must live a low-income lifestyle because they owe the banks most of their money in mortgage payments.
Slowly, millennials are realizing the reality of the real estate dream. This is why millennials prefer to spend their money on education and travel over buying a home. A house was traditionally considered an investment. We will discuss seven reasons why buying a home is not an investment.
Because they can be quickly sold when needed, investments are very useful. Take stocks and bonds as an example. These investments are easily exchangeable for cash on a quick market. This is true for investments like gold and silver as well. Middle-class investors hold real estate as the only illiquid asset in their portfolio. It is not easy to sell real estate in any market. It becomes more difficult in downturns. Sellers often have to wait 6 months to 1 year to get cash to replace their property. The middle class should not have large amounts of their portfolio in assets they can’t withdraw easily.
The real estate market is opaque and illiquid. Stocks, bonds, and other securities have listed prices that are identical to transaction prices. In the case of real property, however, the listed prices may be very different from the actual rates at which transactions take place. A buyer may not be able to determine the right price for their purchase. If buyers and sellers aren’t careful, the market is known for being ripped off both by unscrupulous intermediaries.
Transaction costs for real estate are also extremely high. First, every sale requires that the government be paid a substantial amount of money. Every real estate transaction involves costs like legal fees, brokerage, and appraisal costs. Transaction costs account for approximately 10% of the transaction cost. This contributes to the above-mentioned illiquidity. The bottom line is that buyers will be stuck with the property even if they make a mistake because of the high transaction costs.
Low Returns and high Expenses
Low returns are a hallmark of real estate investments. The returns on real estate investments have historically been lower than inflation. Only in recent years has there been a sudden increase in capital appreciation on real estate. Rentals are also very low. Renting out a house requires a lot more effort, time, and money. It is often difficult to rent houses. There is also a risk.
The returns from real estate can be compared to risk-free investments, even though there are many risks involved. Realty is a poor investment for the middle class.
A person who buys real estate has to live in a specific area. Real estate can’t be sold or bought again too often due to the high transaction costs. There are very few opportunities to settle in one area. This is why many millennials have decided not to purchase a home. A house is more of an asset than a liability in this age of job cuts and layoffs.
Real estate purchases are often leveraged, as we’ve already said. This means that large amounts of income are being paid in interest. These payments are made under the assumption that real property prices will rise. Investors stand to lose a lot if prices don’t rise. Investors can lose money even if the price falls. Investors have already lost a large portion of their savings, even if the price remains stagnant. They paid interest.
Real estate is the largest expense of middle-class people’s salaries. It also consumes most of their portfolio. Instead of having a balanced portfolio that protects investors in the event a downturn occurs, the majority of the savings of middle-class people are invested in the housing market. The entire economy was devastated when 2008 saw the housing market collapse.
Bottom line is that “buying your house as soon as possible” is outdated advice. Millennials are acutely aware of the financial pitfalls associated with owning a house.