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
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“.