Your Home is Not an Investment

I have recently heard people saying they are looking at buying a house. Some want to move up to something bigger and others are first time home buyers. Mortgage rates have fallen substantially over the last week and look to be heading lower. With all of the foreclosed homes adding to too much inventory, there are many great deals for buyers.

Many home purchases look at their primary residence as an investment that will return outsize returns over time. However, when you run the numbers, home owners should come back to reality.

After researching the true costs and returns of housing, there are definite short comings to thinking your house as an investment similar to stocks. The following is the average cost of owning a home from 1977 to 2007. 

The Cost of Homeownership Over 30 years (1977-2007)

Mortgage: $50,000 (Median Home Price in 1977 $48,800)

Down Payment: $10,000

Interest: $50,000 (average rate in 1977 = 8.72%; includes tax deduction for 33% bracket)

Taxes & Insurance: $90,000 ($3,000 a year)

Maintenance: $54,000 ($150 a month)

Major Repairs & Improvements:  $150,000

Total Costs: $394,000

Estimated Value in 2007: $290,500

Loss = $103,500

Remember these numbers assume you stay in the house for 30 years. The average homeowner moves within 7 years. This raises the cost of homeownership significantly because of realtor costs, higher taxes because of increased assessed values, multiple repair/improvements, and moving costs.

House Appreciation

According to the S&P Case-Shiller home-price index, since 1890, home prices have increased between 2.5% and 3.0% a year. This increase is adjusted for inflation. Various researchers project average prices will increase between 1% and 4% per year after inflation over the next 20 years. These numbers reflect an increase in value and not the total cost of owning a home. If you include those costs you are likely to be slightly if at all ahead.

Stock Appreciation

From 1926 to 2006, a diversified mix of 50% stocks, 40% bonds, and 10% cash would have returned 5.61% after inflation. If you take 1% off for expenses you are left with a return of 4.61%.

Stocks vs. Home Ownership (1977 to 2007)

Earlier we discovered a home bought for $50,000 in 1977 would be worth $290,500 in 2007.

Take $50,000 and invest it in a mix of 50% stocks, 40% bonds, and 10% cash. From 1977 to 2007 this mix returned an average of 10.33% giving you $945,505. 

We all need a place to live but realize that putting money in a mortgage is not investing.

Source for Costs of Ownership from Office of Federal Housing Enterprise Oversight

Market Return information from Ibbotson Associates.