Your Home Never Was an Investment

A couple years ago I asked if your home was an investment or not. The main question was whether or not you should count on your home to deliver good, solid gains over its lifetime (like you'd expect from an investment) or if it was simply a place to live and possibly get moderate gains, but not expect much more. As you might imagine, opinions were divided on the subject.

The reason I'm bringing it up again is that I found this Wall Street Journal piece that says home ownership never was a road to riches. A summary of their thoughts:

Columbia Business School’s Christopher Mayer, who has studied housing markets, says our experience with home-price gains is pretty typical. Home appreciation nationally has run about 1% above inflation over time.

The big price run-ups from the late 1990s through 2006 or 2007 were an aberration. The biggest value you derive from home ownership isn’t appreciation. “It’s being able to live in it,” Prof. Mayer says, and avoiding the rent you would otherwise have to pay.

Once you add in imputed rent and subtract property taxes, Prof. Mayer estimates, my 2% annual home-ownership return looks more like 6%.

That’s why you should buy as much home as you need—but no more. A bigger home than you need isn’t an investment—it’s an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesn’t make it a smart move financially.

A few thoughts on this topic from me:

1. 6% isn't bad these days. Then again, compare it to what stocks can/should do over the long-term and it's way below "investment" grade.

2. I think home ownership is an investment of sorts as it's part of your overall asset allocation. As such, owning at least a basic home is part of a good investment strategy (when looked at from a broad perspective) IMO.

3. That said, you don't need to buy more than you really need. As I've shown, it can be really costly to do so.

4. My general feeling is that you should use my formula for buying a house -- a home that fits your needs and budget -- and use the surplus to invest (versus socking most of your savings in your home) if you're seeking to maximize your net worth.

Of course, if you simply want a bigger/more expensive home and can afford it, then go for it. Just don't count on it earning you what you'd get from alternative investments.

Comments

[Cherry Blossom]

If there is one area where a home should be looked at as an investment (or just sound personal finance) it is in getting the home paid off before retirement. Who wants to retire with a home payment or rent. Most people will retire on a fixed income and that monthly mortgage payment money could be used elsewhere. Add to that the risk of illness as you get older and you risk losing your home.

[LotharBot]

A home isn't an "investment" in the sense of having huge monetary returns. It's an "investment" in terms of security. Once it's paid off, your living expenses plummet. Even before it's paid off, your payments should stay constant while your income grows, so it takes up less and less of your income (and certainly less than renting!) This means you can divert your raises into real investments instead of rent.

[JT]

It's a difficutl topic to discuss, because I think it depends on the area, time and way that you buy your home. A fifty year mortgage doesn't feel like an investment to me, and a home in a crowded urban setting won't increase in value that much. However, buying a home in the right place at the right time can be an investment.

[MC]

Of course a home is an investment!

Besides the obvious (you are investing in a fixed rate of "rent" for the next 30 yrs), a home is an investment in a certain kind of lifestyle.

Buying a home is also an investment in your family and most likely also a quality education for your children (if you buy in a good school district, which you definitely should).

And if you're smart, you'll also try to buy a place that won't be an albatross to unload somewhere down the line, and that doesn't require ruinous amounts of money to keep up.

[Michael]

What's your definition of investment?

Regardless of if you think of it as an investment, you will either gain or lose when you sell it -- just like an investment. Compared to most purchases a house is fairly likely to be worth more when you sell it than when you bought it.

If the financial pros and cons (rent vs. buy, taking into account the current housing market etc.) are a big factor in buying a house, then you likely hope to see a financial benefit in buying a house. Some of that benefit could be in saved rent, some could be in hoping to sell the house for more money in the future.

If these are considerations then I would say you are looking at it as an investment, even if you don't call it that.

[Alex]

Ever since I moved out and started renting apartments, I can't wait to actually own a piece of property. I won't be using dollar bills as wallpaper though. I'll settle for mowing a giant smiley face on the front lawn.

[ctreit]

I agree with Cherry Blossom. A home is sort of an investment. Historically it has been the source of wealth for many generations. But this wealth has only been created by diligently paying off the house. Cash-out mortgages and interest-only mortgages are recent inventions which work against the idea of paying off the mortgage and accumulating some wealth. So, owning a home is not a bad idea. Owning a homoe AND using it as a piggy-bank is a bad idea.

[Andy]

Just don't let the FEES eat away at your investment! I think there are a lot of incidental costs with a home that are rarely counted when compared to renting. Mowing the lawn, fixing broken things, etc. Maybe there are fringe benefits that outway those costs, but I bet you could get really complicated in your calculations. There are always plenty of ways to spend money on your home which you probably wouldn't have done if you were renting and they probably won't affect the resale value.

[rwh]

We're on our 3rd house. We lived in the first one for 5 years and because we didn't have to spend much in maintenance we made a nice return on the original investment (the down payment) when we sold it.

The second home we lived in 12 years and made a positive return, but despite the house more than doubling in price, we spent so much money on repairs and remodeling that the overall return was very modest. But during the same 12 years (1996-98) the return on the broad stock market indices was flat to negative.

So maybe even the minimal return on our 2nd house was better than we would have done otherwise at the time.

We haven't lived in our current house long enough to have a track record, but our tax assessor is trying very hard to convince us it has appreciated in value!

[rwh]

On the last bit of FMF's comment "......versus socking most of your savings in your home"

I understand this is meant to discourage buying too much house, but let's say a young person buys a house with the conventional 20% down and takes out a 15 year mortgage (because they didn't buy too much house). Then they put most of their savings into paying down the mortgage in less than 10 years.

Have they "socked most of their savings in their home"?

[FMF]

RWH --

For most people (those with an average income -- not to mention those with average expenses) if they buy a home and pay it off in 10 years, I think they'll have very little left over for any other savings. Therefore, they end up having socked most of their savings in their home.

[MaxGXL]

Your home is never an investment if you only have one. Youve got to have at least a second property that is increasing in value over time. So when you go to sell it you get a nice chunk of money in you bank account without having to downsize.

[Cyn94601]

I'm not sure I agree that your home is not an investment. What I would say is that "Your home isn't always a GOOD investment" - but I do believe it's an investment.

It seems to me you always have to have a place to live and there will be some cost associated. If I reant a home at 1k monthly and I own a home at at 2k monthly. The home investment is an incremental 1k - since I would have had to pay at least 1k just to live.

Owning a home does mean more expenses, but it could also mean (in the right market) that my investment could have an oppourtunity to appreciate.

This is never possible in a rental.

[Old Limey]

We're in our second home.
First home purchased in 1963 for $26,950 with 20% down on a 25 year 4.5% loan.
Sold in 1977 for $89,950

Second home purchased about 1 mile away in 1977 for $107,000.
In 1992 when I retired I paid off the loan balance of $33,000.
Current value $1,100,000.

So it was a good investment, we raised three kids in it and they never had to move from school to school, and now the two of us have it all to ourselves and love it more than ever.

The best part of all is peculiar to California - it is Proposition 13.
This proposition was passed in 1978 - it limited property taxes to 1% of the assessed valuation at the time of purchase and the tax can only be increased by 2%/annum. If the house is sold then the new buyer pays taxes based upon the assessed valuation at time of purchase. This is a huge benefit to Californians that have stayed in their home since 1978.

Consequently with my house paid off completely it now only costs me $2,100/year in property taxes to live in a custom 2,800 sq.ft., 4Br, 3Ba home worth $1.1M, on 1/3 acre in the best part of town, in the San Francisco Bay Area, close to everything. That works out to just $175/month. You can't beat that! Plus the climate is so great here there's no incentive whatsoever to move.

You can always tell the rental homes, they are the ones with brown lawns, cracked driveways, cheap landscaping, and lots of deferred maintenance.
If you value pride of ownership and want to live in a beautiful well kept up home you have to be prepared to maintain it which can be quite costly at times when you need a new roof, a new driveway or a new paint job.

Bottom line - I don't regard my home as an investment as its value is meaningless since we all need a place to live. It does however add another layer of security since it could always be sold if the surviving spouse has to live in a special care home during their final years and they need the money to help pay for it.

[Mike Hunt]

Old Limey,

Good on you- sounds like the stars were aligned for you!

FMF and all,

Your home is an investment in the sense that you are paying for cash up front with an expectation of how your asset will perform over time, this is in line with the principle of investing. Which is why people consider location and what will be the future expectation of the property value, neighborhood, etc. It's also an emotional investment as you will have many memories in this place as you and your family grows up there.

The last few years (before the bubble burst) have spoiled peoples expecations on what home ownership brings. I expect a few more years of price adjustments and a change in mindset before people start to think about owning a home as a free ticket to riches. Blame the legislators and the banks offering HELOC loans, and blame the people who took them as well.

-Mike

[U. Tony]

A house might be an investment, but is it a good investment? There are places in the US with high property taxes and low rent rates where it just doesn't make sense to buy. It also depends on how long you plan to stay in the home. For short periods (1-3 years) a house is never a good investment.

To asses your particular situation you can use the buy vs rent calculator at the New York Times:
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=2#

This calculator takes into account things that most people don't factor in like: property taxes, insurance, maintenance, inflation and return on investment of excess cash when renting.

[Terry]

Your home is a defensive bastion against soaring rents, gentrification, and displacement.

Unfortunately, the people who most need this defensive asset can't buy it.

[Terry]

Re:

Consequently with my house paid off completely it now only costs me $2,100/year in property taxes to live in a custom 2,800 sq.ft., 4Br, 3Ba home worth $1.1M, on 1/3 acre in the best part of town, in the San Francisco Bay Area, close to everything. That works out to just $175/month. You can't beat that! Plus the climate is so great here there's no incentive whatsoever to move.

Is this a great country or what?

(Well, for the homeowner, it is.)

[Terry]

Re:

This calculator takes into account things that most people don't factor in like: property taxes, insurance, maintenance, inflation and return on investment of excess cash when renting.

I'm renting, and I don't have any excess cash. In fact, none of the many other renters I know has any excess cash. Where would renters get excess cash?

[Em]

Re:

I'm renting, and I don't have any excess cash. In fact, none of the many other renters I know has any excess cash. Where would renters get excess cash?

I'm a renter with excess cash, from living someplace reasonable and spending less than I earn.

[Scordo.com]

Good post. I'm a big proponent of buying a multi-family home (for income generating potential) and also living in one of the units. A single family home generates no income and requires constant $$$ for upkeep.

Best,
Scordo.com

[Phillip]

Americans have been conditioned into thinking that a home is desirable and an "investment" by the industries surrounding the housing sector. People often say "I only paid 250k for my home, and now it's worth 500k." But, there are other factors conveniently overlooked, even in the story above:

1. After interest, you may well have paid close to 3x the purchase price over the life of the mortgage. So, that 250k home actually cost you 700k. But wait, there's more!
2. Opportunity cost. If you had put 20% down on a 250k home, what could that 50k have earned in the intervening 30 years? Quite a bit, actually. Don't forget to add ongoing property taxes and association fees to this bucket as well.
3. Those repairs. e.g. new roof? Didn't need to spend that.

Of course, these potential savings of renting over buying assumes that you're responsible and didn't spend that 50k down payment on a new Lexus. Which gets to the point, really. Which for me is to live modestly and enjoy life. All this stuff just gets in the way, and after all is said and done, you can't take it with you.

Had I purchased a home I'd never have gotten to do many of the things that have meant the most to me. I'm not interested that others live as I do, but do wish that other options were presented in addition to the same old life of consumption that everyone in America seems to buy into unquestionably.

I love my apartment, and don't live in it because I can't afford something else - imagine that!

Ciao!

[deRuiter]

ANYTHING ON WHICH YOU SPEND MONEY IS AN INVESTMENT. Some investments are better than others. You "invest" in your wardrobe, but except for looking nice and selling the stuff afterwards at a yard sale, you don't reap a profit. A home can be an excellent investment, especially if you make it multi task instead of drain you financially: 1. run a small business out of the home as well as live in it. 2. Buy a two family and let the tenants help pay the mortgage. 3. Rent out one or more rooms in your house. If you're single, run the place as a house share and pay no taxes on what your roommates kick in to support your joint lifestyle. 4. Rent out the garage to someone for storage. 5. Plant a garden if you have a yard and get almost free vegetables. 6. Run a yard sale or two at your house and make extra money that way instead of paying to set up at a flea market. 7. I used to have a house in a commercial zone and the back yard was rented to a moving company which parked a van there. PREPAY ON YOUR MORTGAGE THE FIRST THIRD OR HALF OF THE TERM when a few dollars in principal reaps a large amount of interest you don't have to pay with after tax dollars. MAXIMIZE THE USE / INCOME FROM YOUR PROPERTY. Be a winner, not a victim.