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Your Home Is Not An Investment

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Farm House with Rising SunA few years ago, when the housing market was sizzling hot, everyone and their mother talked about how their home was a fantastic investment. They talked about how a home that sold ten years ago had quadrupled in value over the last five and cursed themselves for not buying more. I knew someone who owned four rental properties, all bought on ARMs, and was making a “killing” on the rents and appreciation. I knew someone else who was looking at his paper riches and marveling at how wonderful homeownership was.

Then the housing market stalled. ARMs reset. People were in rough shape. Those who overextended learned something the prudent have always understood, as much as your home is a great place, it’s not an investment.

Value of Homes Appreciate with Inflation Rate

There’s a great analysis of home appreciation versus inflation that concludes that home prices don’t appreciate faster than inflation. Michael Bluejay takes a look at historical data provided by the U.S. Census, the NAR, and the Case-Schiller index, so it’s not a guess… it’s based on hard data.

One big insight that I think many other analyses miss is the increase in the average size of a home. When you look strictly at census data, new homes increased in value an average of 5.4% a year, compared to 4.4% annual inflation over that same period (1963-2008). However, when you consider that the size of a home increased from 983 square feet to 2349 square feet, you’ll see that we’re simply buying bigger sized houses!

An investment has to beat inflation, not match it, because otherwise you’re taking a risk for no reason.

No Improvement Is Profitable

Every year, Remodeling magazine does a survey on the best home value renovations. No matter which year you look at, there is never a remodeling job that ends up being profitable. In 2007 and 2008, the best home value renovation was adding a deck and that topped out at 85.4% and 81.8%, respectively.

So as your home ages and needs major repair work, you’re immediately taking a loss on that “investment.” Our home was 25 years old when we bought it, in the last three years we’ve replaced all the windows and replaced the roof at a total cost of $12,000.

Carrying Costs

When people talk about how they bought their house for X dollars and sold it for Y dollars, they rarely talk about the interest and property taxes they’ve paid as they owned the house. It’s very exciting to hear about a home that has double or even tripled in value (or more!), but property taxes and interest are annual expenses that often get ignored when looking at the headline numbers.

Even when you account for the tax benefits, the costs can be substantial. The national average effective property tax rate (2000 census data) was 1.1127% and the national average value of a home is $158,934, so you could expect to pay $1,768 a year in property taxes. Slice off 25% for income taxes and it’s still $1,326 a year. It’s not an inconsequential amount to pay each and every year.

Transaction Fees

If you want an investment, buy a stock. You can get into and out of a stock for free at Zecco, for $2.95 at OptionsHouse, and for $4.95 at TradeKing. Want to buy or sell a house? Be prepared to fork over 4-6% of the sales price as a commission to the real estate agents involved. Can you imagine paying 4-6% of each stock transaction? No one would ever do it.

Not only are the transaction fees high, the market is illiquid. Buying or selling a home can take a long time. With a stock, you can expect it to be gone within minutes in a marketplace that has many participants. You sold it at the best price possible the moment you sold it. With a home, you can’t be sure. If you have only one buyer or you are the only buyer, you don’t know if you have good price because it was determined in an open marketplace.

Summary

There are many benefits to owning a home and I’m a huge fan of it, but don’t justify buying a home by thinking its home is an investment. It’s not.

It is, however, a place to live, a place to make your own, and a place to make yours. It’s a place to put down roots, a place to raise a family, and a place to grow old in. It’s a place to call your own, it’s just not an investment. It’s a home.

(Photo: orvaratli)

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54 Responses to “Your Home Is Not An Investment”

  1. MyMeans says:

    I totally agree that homes shouldn’t be the majority of your assets/investments for the majority of Americans. The analogy to stocks is perfect because they both have a risk that you can’t time unless you’re on top of things and constantly watching/researching, which most normal folks aren’t. However, if homes/properties are your full-time job, then it can be profitable (if you’re smart/lucky).

  2. Patrick says:

    Homes are great to own, but nobody should put all their eggs in one basket and expect that their homes will gain in value and give them a return.

  3. g says:

    The average net worth of a person who rents in Canada is $2000, the average net worth of a person who owns their own home is $100,000.

    So much for this so called “expert”.

    • Alen says:

      You’re looking at it all wrong. People buy homes because they can afford to. So naturally, their net worth would be higher. You simply can’t look at those who rent and those who buy. You need to compare at various income levels, for example those who earn between 50-75k/yr or those that make 75-100k per year and then sub-divide those into renters and owners. The article simply makes you aware that home ownership is not necessarily an investment. You’re paying interest at 7%. You’re paying taxes, insurance, etc.. Would you be better off buying a house, buying stock, or investing in something else?

  4. David Brusiee says:

    Of course all bets are off if you are talking CA over the last 30 years. My house appreciated about 800% by 2005 but is now down to about a 600% gain. If this wasn’t a good investment I don’t know what is…

  5. @David Using the rate of return calculator on CNNMoney.com (what CNN says is accurate not me), I did a starting value of $100,000 then 30 years later it was worth $600,000. That’s your 600%. It give me a rate of return of 6.15% over those 30 years. Your example completely supports this article. Yes you got a good rate of return on the outside but what other money did you put in. You need to account for taxes, insurance, maintenance, inflation, etc.
    Jim should say thank you for your help and support.

  6. skarrlette says:

    I am glad to finally see someone busting the myth that you have to buy a home. First off lenders are not doing anyone any favors, a home that costs $300,000.00 at the end of mortgage you have paid almost double that in interest. Wouldn’t the person have been better off saving the money and buying the home outright for cash??? I just don’t get the mindset that everyone in this country has fallen for. Rent a small apartment and bank all your money. Home ownership is set up to benefit the government and banks. What ticks me off if I buy a house then pay my mortgage for 20 yrs and then lose my job and if I can’t make my payments for 2 mos the bank takes my house? The bank doesn’t give me points for paying for 20 yrs and hold off to see if I get my job back. Does the bank give me some of my money back to help out? Where is my safety net? Who protects me from losing all my money? People have to realize banks our out for banks to make a profit, these loans are not set up to benefit the customer. We have to figure out a better way to buy property in this country.

  7. R.R. says:

    From my perspective, it’s better to keep renting and save the money and in 5-7 years buy the half of mortgage outright. That’s a smart investing. At lease you wouldn’t have to pay the interest that’s twice of what the house is worth.


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