Owning one's home can be a genuine real estate investment, but often is only partly so. In the majority of cases, a family's main reason for buying a home is probably to have a more satisfactory room arrangement or better equipment, to live in a better neighborhood, or maybe a less tangible reason, to be independent or to acquire social status. Fi­nancially, buying a home is an investment if in the long run it either reduces a family's living expenses or increases the market value of their capital. This cannot be settled by merely comparing a month's or a year's expenses incurred under renting versus owning.

A careful comparison calls for drawing up a home-owning / real estate investment budget estimate, say for ten years ahead, and considering such questions as these: Assuming the continuation of mild inflation, what will be the trend in rental charges, as com­pared to all the costs of maintaining an owned home? Will the necessity of paying off a mortgage cause our family to save more money than we would if we rent? Instead of putting our money into the house, can we get better results by investing elsewhere? (We will return to this last question.) Federal income-tax rules favor home owning over renting. In this way, Uncle Sam is quietly helping to finance the millions of new houses out in the suburbs, in addition to the assistance he renders by making it easier to obtain a mortgage and perhaps cheaper.

Owning a real estate investment, whether it is one's home or not, is an equity form of investment. Real estate is the only form of equiti for many savers, all the rest of their capital being in such fixed-dollar items as bank deposits and life insurance. Because home ownership is an equity, if the owner sells he may receive either more or less than he paid for the place. With a home that is unusual in any respect, an owner desiring to sell is apt to have difficulty in finding a kindred spirit who is willing to pay what the place cost. But where the design of the house and its location are of a popular sort, the market price of a house may rise for several years, at least until it goes out of style. As long as inflation continues, the cost of building a new house keeps rising, and this naturally tends to increase the price of older houses.

Also, a growth in population tends to raise the price of building lots in metropolitan areas. If nearly all of the building space within easy commuting distance of a metro­politan center has been filled, so that only a little unused land remains for sale in that area, then obviously the price of building lots, and also of houses already built, goes up. Now let us turn to the debt side of the picture. Most families, when buying a house, cannot possibly raise cash enough to pay the cost; so the only way the deal can be financed is by borrowing on a mortgage. In general, the writer is skeptical of the wisdom of borrowing money in order to buy an investment, especially of the equity type, because if plans are upset, the necessity of paying off a loan at the wrong time may wipe out a man's savings, and even turn them into a minus quantity. But the modern real estate mortgage has queer aspects that may well justify its use by a cautious investor, even though he is not com­pelled to borrow.

The amount of a mortgage or the real estate investment may cover nearly all the cost of a house, so that at the start the buyer puts up little cash. Customarily, the contract requires him to make a uni­form monthly payment to the lender, each payment cov­ering interest plus a little of the principal. The monthly amount is set at a figure that will amortize the entire mortgage in a specified number of years. Suppose that the original amount of the mortgage is $10,000, the interest rate is Vi percent per month (6 per cent annually), and amortization is to be completed in twenty years. Equal monthly payments of about $72 will accomplish this. In the first month, $50 is interest and only $22 is applied to amortizing the principal. In each succeeding month, be­cause the principal has been reduced, the amount required for interest goes down a bit, and more of the $72 goes to reduce the principal of the loan.

To bring out the peculiarities of a mortgage, let us con­sider some alternatives. Suppose a man about to buy a house owns some common stock. Should he sell that stock in order to reduce the amount he borrows on a mortgage? If he concentrates all or most of his capital in the house, he loses the protection of diversification, whose advantage is explained in a later chapter.

Also, how will the rate of return the borrower will re­ceive on common stock, including both dividends and growth in value, compare with the rate of interest he will pay on a mortgage? In some of the older, broadly diversified common-stock mutual funds, the long-term average annual rate of return has been between 9 and 16 per cent, depending on which period of years is considered. In looking at these percentages, we must remember that since 1940, business prosperity has grown considerably, and further increase is expected.

Of course, the future performance of common stocks is uncertain, but it seems likely that well-managed common-stock mutual funds will average a better rate of return than ordinary interest rates on mortgages. However, don't try to play this game before you have learned how to select common stocks whose performance is at least up to average.

In comparison to other ways of borrowing money, a peculiarity of a mortgage is that a borrower knows just when he must pay each installment, and the final payment is many years away. Suppose a home-buyer and stock­holder finds that by putting up his stock as collateral, a bank will make him a loan at an interest rate lower than he must pay on a mortgage. Should he borrow on the stock, so that he can reduce the size of the mortgage?

A bad feature of a bank loan on stock is that the lender is not committed to continue the loan for more than a year or so, and even within that period, the lender can protect himself by selling the stock if its market price threatens to drop below the amount loaned on it. In the past ten years, the market price per share of a broadly di­versified common-stock fund has not dropped more than one third of the way from a previous peak. This suggests that an owner of such stock could borrow two thirds of the current market value without much risk of being sold out. But a major disaster, such as a world war, might cause diversified stock to lose nine tenths of its value, as hap­pened in 1929-32. A few months or years later, probably the stock would recover its peak value, but this would be of no help to a man forced to sell out while the value was down. So for a stockholder who wants to borrow, we be­lieve he is much safer to do it on a real-estate mortgage, if he has a choice.

After a mortgage is in effect, suppose the borrower is accumulating savings faster than required for payments on the mortgage. Should he make payments ahead of time, aiming to get rid of the mortgage as soon as possible? Here again, provided he knows how to select common stocks, probably he will accumulate more capital if he hangs onto the mortgage loan as long as possible and puts the rest of his savings into common stock.

Thus far, our discussion of borrowing money has been a cold-blooded assessment of probabilities. But before a man borrows heavily for a real estate investment or otherwise, he needs to think about his emotions, and probably his wife's feelings also. Will borrowing cause him to worry in the middle of the night? Obviously a large portion of our population are quite callous on this subject; having no financial assets to fall back on, they make a practice of buying things they don't need badly, and will have trouble in paying for, if they run into such a mild difficulty as losing overtime pay on their jobs.  The writer is rather at the other extreme; he just doesn't like debt period!