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FOLKS ARE FASCINATED by what their homes are worth. Along the way, they make all kinds of dubious claims about how much they’ve made—and they miss the big story. Want to get a better grip on your home as an investment? For the moment, forget about your mortgage and focus just on home price appreciation.
Historically, homes have not been a great source of price appreciation. According to the S&P/Case-Shiller U.S. National Home Price Index, U.S. home prices have climbed 4.4% a year since early 1987, not much ahead of the 2.8% inflation rate.
Next, think about all the ongoing costs that homeowners incur, such as maintenance expenses, homeowner’s insurance and property taxes. These costs will vary widely. Property taxes are much steeper in some parts of the country than others. Insurance can be significantly higher if there’s a risk of extreme weather, flooding or earthquakes. Maintenance costs—not to be confused with home improvements—will be greater if you own an older home. While the land underneath your home should appreciate over time (as the saying goes, “they aren’t making any more of it”), the dwelling itself will tend to lose value unless you’re diligent about regular maintenance.
Add up these various expenses, and they might equal 2% or 3% of a home’s value each year. Deduct the cost from a home’s price appreciation and many homeowners will find they are lagging far behind inflation, and perhaps barely breaking even.
Unfortunately, the expenses don’t end there. There are the costs to buy a home, including mortgage-application fees, lawyers, title insurance, home inspections and possibly private mortgage insurance. You’ll pay even more when you sell, notably a substantial commission to the real estate agents involved and perhaps also steep local transfer taxes.
All of this might be true, you concede. But what happens once you figure in the mortgage? That mortgage can potentially take even modest gains and leverage them into big money.
Next: Leverage
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We kept track of every single house expense for over 25 years. We’ve now spent more on the house (including improvements) than we paid for it. We won’t make any profit when we sell the house, but we don’t care. We have thoroughly enjoyed living here.
I think the real estate agents haver overhyped homeownership as an “investment.” If you live in a hotspot with, say, 15% appreciation for several years you might make money. If your house only appreciates 3% per year it will be very hard to come out ahead. Buy a house to enjoy it, not as an investment.