# Poor House?

Kenyon Sayler

MY 95-YEAR-OLD mother recently asked my brother and me what information we could get on our cellphones. While showing her the many possibilities, we went to Zillow, so she could see the information that the site has about the house that my wife and I own.

Zillow estimates that the house is currently worth \$336,700, and said that we purchased it in 1986 for \$86,700. My brother, who is much smarter than me, did some quick mental math using the rule of 72, and said, “Boy, that’s less than a 4% annual return.”

Plugging the actual numbers into a spreadsheet, the return has been 3.8% a year. How am I supposed to feel about that?

There are several ways to look at the question. A dollar in 1986 had the purchasing power of \$2.70 today, so—adjusting for inflation—our \$86,700 home purchase would cost \$234,000 in today’s dollars. Zillow thinks we could sell the house for more. That means the house has beaten inflation. Perhaps I should feel good.

On the flip side, the S&P 500-index rose from 235 in 1986 to 4,228 at yesterday’s close. Had we invested our \$86,700 in the S&P 500, the money would be worth almost \$1.6 million—considerably more than our home is currently worth. Maybe I should feel sad. Of course, nobody would have loaned us \$75,000—our initial mortgage amount—to plow into the stock market. Even if a lender had, our “equity” would have been wiped out during the October 1987 market crash and we would have received a margin call.

The house didn’t just cost the purchase price. In the years since our 1986 purchase, we’ve paid \$71,760 in property taxes and \$50,469 in mortgage interest. Spending 15 minutes looking through my files, I identified another \$38,811 of home improvements that we’ve made, things like replacing the windows and upgrading the floors. That, coupled with the initial purchase price, brings our total housing cost to \$247,740. That means that we’re ahead by about \$89,000.

This list doesn’t include the cost of the deck we added, the gallons of paint purchased, the landscaping we’ve done, the new shed or the thousands of dollars that we are about to spend remodeling the kitchen. At best, we would be lucky to break even if we sold our house. I’m back to feeling sad.

Economist tell us that, on average, housing appreciates in line with inflation, and that the real value of the house is the imputed rent—the value you get by living in the place—or the money you save by not paying rent to others.

I don’t have good numbers on how much we might have spent on rent. But I know that we had been renting an apartment for \$850 a month when we moved into the house. Zillow says that today we could rent our house for \$1,724 a month. Assuming a linear increase in rent over that time, we would have paid \$571,428 in rent over the past 36 years.

When I calculate our net worth, I do get to show a house with a value of \$336,700. That means the house has saved us \$570,000 or so in rent, plus it puts a \$336,700 asset on our household balance sheet. Offsetting that is the \$247,740 in housing costs that we’ve incurred. Still, owning has proven to be a much better deal than renting. Now, I’m feeling better about the house.

Of course, this is just the monetary value of our home. A significant added bonus: It’s also a place that protected us from storms and cold, where we celebrated holidays and birthdays, and raised two terrific men. Whether I look at the house as just breaking even or making us a heap of money, I’m satisfied with the value we’ve received.

Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon’s brother Larry also writes for HumbleDollar. Check our Kenyon’s earlier articles.

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Richard Gore
9 months ago

I’m not sure that interest cost should be included in determining the cost of a house. One is an asset and the other is a liability. How I finance an asset shouldn’t affect its cost.

The trouble I have with home appreciation is that it generally affects all houses in the area so unless you plan to move to a lower cost city it doesn’t seem to do much good because you must plow the proceeds into another inflated priced home.

John Wood
9 months ago

I’m reminded of Charlie Munger’s line, “Life is more than being shrewd at passive wealth accumulation.” The owning of a home provides control over the destiny of one’s shelter, the ability to eliminate house payments, a store of value, and a hedge against long term care costs in old age. I value these attributes of home ownership far more than its rate of return.

Mike Wyant
9 months ago

Location, location, location. My brother bought his house in Silicon Valley in the mid ’80s for \$125,000. It’s currently worth (according to Zillow), over 2 million.

Jonathan Clements
9 months ago

Yes and no. If your goal is home price appreciation, location is crucial. But, in theory, all homes should be priced to deliver the same total return — price appreciation plus rent or imputed rent. If homes in an area are expected to appreciate greatly, owners are likely collecting relatively little imputed rent. I like smaller homes. But let’s face it: Those in Silicon Valley tend to be pretty darn small, especially relative to their price tag.

Richard Gore
9 months ago

I assume homes in an area appreciate greatly because people want to live there for whatever reason (jobs, lifestyle, etc) and the supply of homes is limited so presumably rents in that same area should also grow fast as well. Isn’t it just supply & demand.

Mike Wyant
9 months ago

Definitely. The house is nothing special. A tract 1700 sq ft house next to the freeway. And yes, rents are out of sight in the area also.

AKROGER SHOPPER
9 months ago

A house becomes a museum of treasures over time. Apartments not so much as moving forces purging of items that simply are no longer needed. Old vacuum cleaners, rotary dial fones, CRT computer monitors, and other gadgets are stored for safe keeping in homes. Homes are purged of items when sold, usually by others to avoid historical flash backs.

Kevin Thompson
9 months ago

As I have mentioned in a previously authored humble dollar article, your house is not an investment but a place to live. Factoring all cost, my house had appreciated at -5.08% over a 12 year period, however, the annualized value via appraisal was 4%. A house is a store of value and should be measured as such, unless it is a designated rental property.

Last edited 9 months ago by Kevin Thompson
Deb L
9 months ago

Our house has similar small percentage value increase over time. I see additional value in not having to worry about rent increases, and possibly having to pack your life up and move every couple years. I have to say we were lucky and bought a home in a stable neighborhood, so we never wanted to move.

John Redfield
9 months ago

Interesting lookback on the value of your house. More or less kept pace with inflation. However, the value of your home is priceless.

Kurt Yokum
9 months ago

It sounds like you’ve done the math and come to the realization that a house makes for a poor investment. This runs counter to the prevailing narrative. Sure, in some markets under some circumstances and with great timing a homeowner beats the odds. However, a long-term homeowner must think of a home as an emotional investment not a financial one. There’s no place on the balance sheet for Quality of Life.

mytimetotravel
9 months ago

Unless you are planning to live in your car, you have to consider the cost of renting, which certainly increases over time, and introduces an element of insecurity. Most mortgages are fixed, rent is not.

M Plate
9 months ago

I purchased my first house in the 1980’s. I enjoyed your analysis as it resembled my own efforts to figure out all the “what ifs” etc.

ABack then, nearby apartment complex charged \$500 a month for a one-bedroom unit. 6 years later they charged \$575. In 2010 it was \$1000. I shudder to think what rent is now. As interest rates declined from 1980’s highs, my mortgage ranged from aprox \$750 to \$550 over it’s life.

As the monthly payments decreased, I was able to pay it down faster and invest. But as you indicated, plenty of money was spent on house, and taxes.

Chazooo
9 months ago