Lets just come right out with it: Your home is not an investment. In fact, home ownership can be a financial disaster.
Before all of you homeowners call me a jerk, idiot, or unflattering expletives, let me share some objective data as to why a home is not an investment (and keep in mind that I am a homeowner too).
The reality is that housing prices have barely outpaced inflation over the last 125 years. Inflation adjusted housing prices are just 1.35X what they were (in 2013 dollars) in 1890.
That means only 35% growth above inflation in 125 years (or 0.28% average growth per year)! And growth exceeding inflation has been approximately 0% over the last 60 years.
The chart below effectively squashes the legitimacy of any claim to a home being a good investment.
Were homes good investments from the mid-1990’s until 2007 (as evidenced by that huge spike on the very far right of the above chart)? I suppose, but only if you consider riding a bubble and jumping off of it right before it bursts as “investing”. In order to have actually cashed out on that “investment”, you would have had to sell your home prior to the crash.
Had you “invested” in a home at just about any other time in modern history, you would have performed miserably compared to the stock market, bonds, and just about any other type of investment.
Housing prices are just like stocks, in many ways. We all have an idea whether they might go up or down, but nobody really knows. Trying to market-time a housing purchase and sale is no more legitimate than trying to do the same with a stock. It’s a guessing game, with the winners being the lucky ones. This is only slightly better than gambling in Vegas, in that inflation does increase prices slowly over time (the equivalent of finding a chip on the floor when walking out of the casino after 60 years of breaking even).
If you’re happy with your investments not shrinking (and barely growing), then looking at your house as an investment, might work. But I am guessing most of you will not be happy with those results. And in order to cash in on your investment, you’d need to sell it. But then you’d be without a roof over your head.
And remember, those staggering 0% annual returns often come at high costs:
- property taxes
- home maintenance
- home repair
- home insurance
- borrowing costs in the 4%+ range
- utility expenses
- liability
These will easily push you into negative return territory.
There are a lot of good things a home CAN be:
- a form of necessary shelter (4 walls around you and a roof over your head)
- a place to settle in and make your own
- a possible cost saving compared to renting, if you pay off borrowing costs, and the total cost of homeownership calculates out positively
- a source of pride and enjoyment
But a good investment? Not unless you’re getting positive rental income off of it. Perhaps this is one reason why we should kill home ownership as the “American dream“.
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“And in order to cash in on your investment, you’d need to sell it. But then you’d be without a roof over your head.”
That right there sums it up for me. Your home is to provide shelter for you (and your family). Why would you consider it an investment or even use it as collateral?
But not everyone views it that way so I avoid that debate with people.
Many people consider it an investment since they think they’ll live in their current home for a few years, wait for its value to skyrocket, then sell and move to a more expensive house, rinse and repeat. Also, a good number of net worth calculations consider the value of one’s home – that’s actually accurate, although logistically problematic since if you sell it you’ll need somewhere else to live. If you’re that desperate for money, you’ll probably sell it below market value anyways since you need cash yesterday. But if it’s in a calculator developed by the financial experts, it must be an investment!
I totally agree! You home is not generating income so how could it be An investment?
A home generates income in the sense that it offsets any rental payment you would have in absence of home ownership.
This is often called imputed rent.
There are few cases where the TOTAL costs of home ownership are less than renting, but home ownership does provide a form of ‘income’.
Great article. Great insight.
Thanks for the article! I find a lot of conflicting information out there about home ownership. Some blogs and books I’ve read say you can never be wealthy or well-off if you don’t own your own home. I wonder, do you agree? After all, it seems there is a difference between whether your home is an investment and whether you can get wealthy without purchasing a home (or rather, leasing it for 30 years from a bank who can take it away easily).
I personally have no inclination to own a home, and it just doesn’t seem a good option for someone like me. I’m 26 years old–by the time I come up with 40k for a downpayment, I’ll probably be in my mid-30s. Then to be tied to a mortgage for 30 years? Plus having to replace the water heater or the roof and deal with crazy property taxes? I don’t see how owning a home can be a plus, at least for someone in my situation.
Good question. Like I stated in the post, owning a home (paying mortgage) can be a cost saver vs. a rental, but really only if you pay it off. Until you own it free and clear, it’s likely not a cost saver. And if you invest rental savings, that might be the smarter route. There are so many geographical, loan term, investment variables that I cannot definitively say one is better than the other for overall financial well-being. Really, the point of this post is to squash the myth that homes are investments. So long as a home is your personal residence, it is not an investment at all (at least not a good one).
If renting were always cheaper than buying than it would be impossible for anyone to rent any real estate for a profit. Since that statement is not true then it follows that, in some cases at least, it is more advantageous to buy over rent.
While it *may* be true to say that a house is a poor investment, I don’t believe it is correct to say that a house is *not* an investment.
Great post. I like the inflation adjusted home price index, that definitely drives home the point!!!
Great post. “Buying” a home is not an investment. However, it is a viable form of rent control, for those of us who don’t expect to pay off our mortgages. I live in an area with high housing costs and left an apartment where I lived for 23 years. It was rent controlled. When I left, the landlords almost doubled the rent to what I am currently paying in mortgage. Since I have a thirty year mortgage, I have a thirty year rent controlled lease with the bank. If I were in the rental market, my housing costs would be increasing every year. Only if I pay it off do I own it. Otherwise the equity will either go into other housing or to my heirs. I don’t expect to make money on this. But having a place to live is priceless.
Agreed. Great point.
If your mortgage payment was the only thing you paid for your house, you can consider it a form of rent control. However, if you need a new $20,000 roof, you call the landlord if you are renting. I had a friend whose house needed a new roof, furnace, well, septic system, and water heater in a 2 year time period. You hear the saying “If you rent you get nothing in the end”. That’s only true if you pissed away the cash you saved by renting instead of investing. When I left real estate sales, most of the people who bought from me were upside down in their mortgages, often to the tune of $200,000-300,000. They couldn’t go to another state to take a better job. It’s a horrible situation to be in.
Entrepreneur and self-help guru James Altucher can tell you all about that:
http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to-own-a-home-again/
Definitely agree. Your house is supposed to be your home, not an investment. You said it right, it’s not like you’ll just up and sell every now and then to make money off it.
As a professionally licensed real estate agent in Florida I see a lot of people get caught up in this myth of their primary house being an investment. It’s important to teach and educate when selling real estate, figure the cost of the average home in the U.S. according to the national association of REALTORS was $214,200… That’s a large sum, yes it’s an investment….
But, the 1st rule of investing is…
Never put all your eggs in one basket, that saying holds true when investing. If you’re buying an average priced house and put 20% down, say $40,000, which could easily be your whole savings… maybe all your life’s work so far… The investment savvy thinker realizes this doesn’t do anything for them in the form of diversification. All the eggs are in one basket. That would break the 1st rule of investing; never put all your eggs in one basket.
The data above seems misleading. The Case shiller index clearly shows a huge increase in house prices in the last 30 years or so. There may be some correlation to the regulations passed in the mid 80s regarding mortgage backed securities, but it’s a legit trend. Plus, with people re-urbanizing real estate in metro cities is poised to continue appreciating. How that isn’t an investment worth considering is lost on me.
BTW I’m talking about the Case shiller 20 city index, not whatever is posted here in this article. NY Times has a graph showing the last ten years for these cities as well and the trend is pretty strong in spite of the crash in the 2008-2009
What is misleading? It’s the Case Schiller national index over the last 120+ years, adjusted for inflation.
It is an index of median home prices so it does not account for mix. So for example if someone bought a fixer upper for 100k, put 70k into it to fix it up and sold it for 200k, the index would double.
I don’t think its accurate to say a house is NOT an investment at all. It is just harder to see the type of return one can get from this type of investment. For example, in 1985, my mother bought the current house she lives in for ~$500k. This San Francisco house is now worth $1.3 million. But that’s not the point.
Even though she’s not selling it and cashing out, the rising value of the house has indirectly given her a huge ROI.
Owning the house has allowed her to get a Home equity loan, which she used over the years to put down payments on 3 cheaper investment properties outside of San Francisco. They are all generating rental income now, and rising in value.
So this alternative form of return on her investment has made my mother very well off right as she prepares to retire. She will be generating a couple thousand dollars in rental income per month. Plus principal & interest of each mortgage paid for? Not bad in my book.
Her home gave her leverage to buy other actual investment properties. So in some cases, your home IS an investment, maybe not for direct cash ROI, but in other forms.
Homeowning is a kind of lottery. You don’t know if you win or lose, or when you win or lose. Your mom did well, but it’s not a good idea to depend on blind luck. House prices can drop 50% and stay there for a decade. It happened in CT. Yes, it’s true that over a long enough horizon, you will make out. Life does not cooperate with that plan. You may need to retire sooner than you planned. You may be given an option of taking a good job out of state or getting laid off now. If you are upside down in your mortgage, you are sunk. More than half of all marriages end in divorce. You may have to sell the house and split the proceeds. Savings/conservative investment is a better way to go thru life. You have control.
Stephen,
When you consider the inflation rate over the past 28 years the rate of return is actually quite poor for your mothers home. According to this calculator (http://www.coinnews.net/tools/cpi-inflation-calculator/) $500k back then would be worth twice as much now ($1,085,055), so you’ll need to base your calculations from here. That is only a $215k difference or a 20% return. That’s only 0.65% rate of return each year. When you factor in the interest costs, maintenance fees, etc I’d be willing to bet that your mother actually lost money.
As a comparison, the S&P500 stock grew about 900% over the same time period.
But what about the (rising) costs to rent a similar property? Seems that the math here should factor in something to have shelter… otherwise, you’re assuming there is no cost associated with renting. Oh, and the ROI on that cash outflow…. 0%.
I defintiely agree that it is financially better in this case to own than rent (that calculation would all depend on the price/rent ratio). The argument here is “don’t buy more house than you need”. If you only need a $200k house to live comfortably but can afford a $500k mortgage then you’ll be financially better off spending the $200k and investing the rest in stocks or bonds. Whether you’d prefer to invest rather than spend is a matter of personal preference.
Although I do not look at housing as an investment, I do not look at all the maintenance costs/upkeep as such a negative aspect as some people have here.
Almost everything you own requires maintenance from time to time. Take a bicycle. If you own a cheap one, as soon as something breaks you are buying a new one. However if you buy a nicer one getting a tune up every couple years ($65 in my area) is also an expense. Heck, even shoes wear out and need to be replaced. Appliances, computers, etc etc all can require some type of maintenance or more so these days right out replacement as items are being designed cheaper and cheaper so they can sell you a new one and conglomerates get the profits vs a local repairman.
I’m very curious how the people that argue maintenance and upkeep as making a house less appealing from a personal financial growth perspective think of anything else they own that requires maintenance. Do you not own forms of personal transportation? Have you only owned one pair of shoes for your entire life?
I completely understand the numbers don’t typically work out buying a home versus investing, but the security is the main reason I do it.
I know, I know. It’s not the smart investment move, but if it what helps me sleep at night while still investing alongside home ownership, it is what it is.
The Warrior
NetWorthWarrior.com
I just bought a new home but I truly agree with this article. The reason why I bought a house is that because I want to have something to call my own and NOT an INVESTMENT. I used to live in apartment for so many years and I was able to save good money for my downpayment. After I bought a house I could barely save money anymore and not only that I am always in constant financial STRESS eventhough I am well prepared compared to other new homeowners. Your Interest, Utilities, Property taxes, home and appliance repair/maintenance, gardening, renovation etc…those expenses are already considered your loss because they will not come back to you. So when is the only chance to make an investment in your home? That’s if you pay cash, rent the property and sold it later at a higher price. But the question is that house pricing is always unpredictable…if the market goes down …kaboom….your house will be your greatest nightmare. I am not saying you don’t buy a house but make sure you’re somehow prepared when you do this. Most of the people who own a house have no money they live paycheck to paycheck and in constant financial stress, some people they even have 3 jobs and no weekends off. I won’t trade my freedom to buy the stuffs that I want,go wherever I want, relax whenever I want……..just for the sake of owning ahouse.
Here’s an interesting picture for you:
– I bought my home in 2012 as a foreclosure for $125,000, at under-market price.
– The mortgage rate was approx. 5%
– The immediate “need” costs, because of the state of the house, were a new roof ($6,000), plus approx. $1,500 in smaller-buck improvements.
– In a twist, the home is now paid off because of an unexpected pile of cash that fell in my lap.
– This foreclosed home is as of 2015 now worth $190,000+ per Zillow.
Now, here’s my interesting question for a financial investment:
– I can rent this 3bd/2ba house out for approx. $1,500 / month and go live in an apartment for $800 / month. But then I’d be a landlord to my own prior residence, which someone could damage, and also be a “non-homeowner” in an apartment for the sake of accumulating more money. At $700 net profit under those numbers, that’s in theory $8,400 net profit for the year.
What do you think of this idea, on both a pure financial plane of view and on a rationale view?
I read a lot of articles about buying a house is not an investment. I would say it depends on your view of investment. If your goal in investment is just for your personal finances for your lifetime then yeah it’s not that great. However if your goal is to invest in something that contributes to generational wealth meaning future generations will benefit from it beyond your lifetime buying a house that could be inherited by your kids, grandkids, and future generation is a pretty great investment from a generational wealth perspective.
So I guess living your life and enjoyment for many in a home purchase is of no value. Please put a price on that! I understand that a home is not for everyone. So be it. But to say a house is a bad investment is not correct. The rise in homes and stock market with everything combined is almost identical. To use an example of the bubble and homes dropping in price is ridiculous. I guess the stock market rose during the bust. lol. I have three rentals paid for and my house is also. THANK GOD. Turned out to be a wise investment as I retired early and only pay property taxes. And money saved creates no issue for any expensive repairs. As I have eliminated outflow of a thousand plus each month in payments. You cant control rent for those who refuse to buy a house for the rest of your life. Many people have lost money in the stock market for many reasons but this is not mentioned in this article. lol