Money From Home

It's never been easy.

Buying a home is a big purchase. It's comforting to have assurance that your expenditure will prove a good investment.

Lately, buyers are likely to find doubt, not reassurance. Hearing the dire news about foreclosed or "underwater" owners, buyers today "are worried about making the same mistakes and are more cautious in their approach to purchasing," observes Delton Cheng, broker-owner of Century 21 Homefront in Brooklyn, N.Y.

Sure, a guarantee that buying a home is a sound investment would be comfort. But the issue is nuanced, not simple, explains Todd Sinai, a real estate professor at the University of Pennsylvania's Wharton School, who recently co-authored a paper examining how homebuying impacts owners financially.

Popular perception, both during booms and downturns are often skewed toward one view, missing the true picture of the financial aspects of home buying. During the recent boom, for example, buyers watched big price jumps, felt and urgency to buy, and assumed big price escalation would continue, adds Cheng.

Here, what experts advise to consider to get a balanced view of the financial aspects of homeowning:

Don't Think Investment

Stocks and bonds are investments, explains Sinai. A home is a need, just like food and clothing.

Middle-class Americans have historically gained most of their wealth from the value of a home (more on this below), but it's really best not to think of a home as a moneymaker, counsels Sinai.

As the housing bubble inflated, "people thought that if they bought something more expensive, it would then be worth even more and they'd make more," Sinai adds.

Not true. Buy something affordable. A home with expenses that still allow for retirement and other savings is necessary because you'll then diversify your wealth, not depending solely on housing values. Moreover, with affordable expenses, you'll be better to able to make payments during unforeseen financial stress, Sinai explains.

Commit To Reducing Mortgage

"The primary financial benefit of buying," observes Steve Weydert, an Irvine, Calif., financial planner, doesn't happen right away.

Rather, it occurs after years of paying the mortgage and you "own a piece of real estate free and clear," he adds.

Indeed, paying down the mortgage each month as a kind of "Christmas Club" effect, notes John Quigley, an economics professor at the University of California-Berkeley.

Big rises in home prices aren't as crucial to building housing wealth as is gradually chipping away at the mortgage balance with each monthly payment. Like the old-fashioned Christmas Club accounts, the regular savings from paying a monthly mortgage is rather painless - assuming your home is affordable to you -- but eventually you end up owning the home outright.

Factor Time Into The Equation

You need a place to live, and can either rent or buy.

"You know what the rental cost is initially," Sinai explains, "but rent [charges] are uncertain over a long period."

Cost of ownership also is uncertain over time, since property taxes and maintenance expenses fluctuate, for instance.

But the biggest financial uncertainty of ownership is what you'll eventually sell your home for, Sinai says.

Looking at long-term averages of rental and housing costs, however, "if you're staying in a home for at least five years, it's hard for renting to compete."

Even if home prices drop five years in the future, Sinai says his research shows that owners tend to move into homes in locations where price levels are similar. "They're also buying their next home at a low price," he observes.

And, should home prices rise, the profit from the sale better enables owners to afford their next home, concludes Sinai.