Exam 2: Concepts of Home Ownership

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Besides the obvious advantage of having a place to call home, homeowners can make improvements to their home, thus increasing its value. They also have more stability since they do not have a lease that could be terminated. Financially, homeowners save on federal income tax because of the tax deductions that the federal tax code allows. They are also building a hedge against inflation in that property values, over the long haul, tend to stay ahead of the inflation rate. In addition, each month when a homeowner makes a mortgage payment, he or she is in essence putting money into a savings account by building equity. Finally, property values go up over time, so given enough time, a homeowner will have made money by purchasing rather than renting.
On the downside, homes are an illiquid asset. This means that it generally takes time to convert the asset (the house) into cash. In a best-case scenario, a homeowner may be able to put his or her home on the market, find a buyer, and close in a month or so. In a worst-case scenario, a homeowner may wait for months before he or she gets an acceptable offer, or prices might be down at the time the homeowner wants to sell, and he or she may have to wait years for the prices to rise again.
There is also the risk of loss, as those in Katrina's path can testify. Some losses are insurable, but others are not. And even those that are insurable still have a deductible, which the homeowner will have to pay.
Finally, if your money is tied up in a house and you are making mortgage payments, insurance payments, property tax payments, you cannot spend it on other things.