Michelle and Barack Obama’s New House
It was reported last week that President and Mrs. Obama have purchased the Washington DC house they were renting for $8.1 million because it is likely they will be there for at least 2½ years. Is this a smart or foolish move?
Actually, I do not care much about what the Obama’s did, but I want to address why I do not recommend similar moves for most people. The Obama’s are in a stratosphere of wealth so that a costly move is not that significant for them. But for most people a loss can be cause an alteration of their plans.
Buying a house for an expected 2½ year period rather than renting does not appear to be a perspicacious financial maneuver. Houses are a long term endeavor and even then they are not necessarily a good investment. Rather, owning a house is a life style choice with long term benefits being the location of where you live with the concomitant schooling, neighborhood, types of neighbors, security, cleanliness, access to services and many other factors.
Realistically the day you close on your house you will lose 10% of your cost. Figure it out. All your closing costs buying and then selling and the brokers fee selling will cost you about 10%. This is hard to make up when there is a short term horizon. Also, the house has to appreciate 11% to recover this since the broker’s fee is also paid on the “10%” increase. Inflation is running below that. Some houses or areas might have extenuating factors causing sharp appreciation such as being owned by a former president or celebrity or a new or growing development in the area, but most houses like all real estate are subject to mundane inflation which right now is pretty low by historic standards.
Further owning a house causes money to be tied up and/or added costs of a mortgage with interest rates certainly greater than expected inflation rates. And time looking for the house, and inspection and legal fees all reduce the short term advantages of owning. While living in the house repairs and all sorts of maintenance and gardening usually crop up. Also, once settled in a house, relocation choices can become deferred beyond the point of comfort because you are “already there” or you need the “right market” conditions to sell.
Many prefer to own, thinking it is better than renting in the long run. It might be, but usually not. Work out the numbers.
The Obama’s reason was to “save the rent” and unless their ownership status enhances the value when they sell, I suggest they would not have made a good 2½ year investment. When you have enough money, it doesn’t matter. However, if you do not have that much money…..
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