Owning a home is often considered a cornerstone of the “American Dream.” Many view it as not just a place to live, but also as a major investment that will appreciate over time. However, when you take a closer look, your primary residence may not be as strong of an investment as you think.
While homeownership has emotional and practical benefits, it doesn’t stack up well against other forms of investment when you consider the costs, liquidity, and rate of return. Let’s explore why your primary home isn’t necessarily a good investment by examining historical data, hidden costs, and comparing home appreciation to other investment vehicles.
1. Home Appreciation vs. Other Investments
Homes do tend to appreciate over time, but not at the rate you might expect. According to the Case-Schiller Home Price Index, from 1987 to July 2023 U.S. home prices have grown at an average rate of 4.8% annually.
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That’s barely above inflation, which has averaged about 2-3% per year. In contrast, the stock market, as measured by the S&P 500 Index, has returned an annual average of 10.26% from 1957 (its inception) to 2023.
(Source)
Even in years when home prices rose, they rarely outpaced returns from the stock market. In some decades, housing barely kept up with inflation. Meanwhile, stock market investments generally produced higher returns, providing far more growth potential over time.
2. Costs Erode Your Home’s Value
As a homeowner, you may have some of these inherent costs, including:
- Mortgage interest: Over a 30-year mortgage, you might pay hundreds of thousands of dollars in interest alone. (However, some of that may be balanced by deductions come tax time. Consult with your CPA or tax professional.)
- Property taxes: Depending on where you live, property taxes can be a significant ongoing cost.
- Maintenance and repairs: Homes require constant upkeep, from roof repairs to plumbing fixes, which can add up.
- Insurance: Homeowner’s insurance is a non-negotiable cost to protect against damage and liability.
- Closing costs and fees: Buying and selling a home involves fees that can reach 6-10% of the home’s price.
(Source)
Hypothetical Example: Estimated Costs of Homeownership Over 30 Years
Consider a home purchased for $300,000 with a 30-year mortgage at a 4% interest rate. Over time, the cost breakdown might look like this:
- Mortgage interest paid: $215,610
(Again, this does not account for possible mortgage interest tax deductions, which may factor in to help reduce this cost.)
- Property taxes (2% annual rate): $180,000
- Maintenance/repairs (1% of home value per year): $90,000
- Homeowner’s insurance: $36,000
Total: $521,610 in additional costs beyond the purchase price. These costs don’t increase your home’s value—they only diminish your return.
3. Lack of Liquidity
Unlike stocks, bonds, or even real estate investment trusts (REITs), your primary home isn’t liquid. You can’t easily convert it to cash without going through the lengthy and often costly process of selling. Additionally, your home’s value is tied to the local market. If you need to sell during a downturn or when buyer demand is low, you may have to sell at a loss.
During the 2008 housing crisis, many homeowners found themselves “underwater,” owing more on their mortgages than their homes were worth. This risk makes relying on a primary residence as an investment even more precarious.
4. Opportunity Cost
By tying up a large portion of your wealth in your home, you’re missing out on other potentially higher-yielding investments. The down payment on a home could instead be invested in stocks, bonds, or mutual funds that historically provide better returns with more liquidity.
Example: Home vs. Stock Market Over 30 Years
Let’s assume you put down $60,000 (20%) on a $300,000 home. If you had invested that $60,000 in the S&P 500 instead, assuming a 7% annual return, after 30 years, your investment would have grown to over $450,000. In contrast, even if your home appreciated at 4% per year, its value would only grow to about $972,000, but after accounting for the costs outlined above, your net gain would be far less.
5. Emotional Investment vs. Financial Investment
Your primary home serves an essential role in providing stability, shelter, and a sense of belonging. While these emotional benefits are invaluable, many people overestimate their home’s value as an investment simply because they have an emotional attachment to it.
It’s important to separate the emotional value of owning a home from the financial realities. Viewing your home purely as an investment can lead to misconceptions about its true return on investment.
Conclusion
Your primary home, while a wonderful asset and a place to call your own, may not be as spectacular of an investment as you think. Between modest appreciation rates, ongoing costs, liquidity challenges, and opportunity costs, the financial return from owning a home is sometimes overestimated.
Feel free to contact us to discuss your investment goals and financial future!
Sources:
- Shiller, Robert J. Irrational Exuberance. Princeton University Press, 2000.
- A key reference on housing market cycles and long-term trends in home prices.
- Case, Karl E., Quigley, John M., and Shiller, Robert J. “Comparing Wealth Effects: The Stock Market Versus the Housing Market.” Advances in Macroeconomics, vol. 5, no. 1, 2005.
- This paper examines how the stock and housing markets impact wealth accumulation differently.
- U.S. Bureau of Labor Statistics. “Historical Inflation Rates.” Consumer Price Index (CPI) Database, U.S. Department of Labor.
- Used for historical inflation comparisons with home price appreciation.
- Federal Housing Finance Agency (FHFA). “U.S. House Price Index (HPI) Report.” FHFA.gov.
- Provides data on historical home price appreciation across different regions in the U.S.
- Poterba, James M. “Taxation and Housing: Old Questions, New Answers.” American Economic Review, vol. 82, no. 2, 1992, pp. 237–242.
- Discusses the tax implications of homeownership and how it affects returns.
- Vanguard. “Historical Stock Market Returns.” Vanguard Investor Education, Vanguard, 2023.
- Provides data on the historical returns of the S&P 500, including comparisons to other asset classes.
- Zillow. “The True Cost of Homeownership.” Zillow Research, Zillow, 2021.
- Breaks down the hidden costs of homeownership, including maintenance, taxes, and insurance.
- Glaeser, Edward L., and Gyourko, Joseph. “The Economic Implications of Housing Supply.” Journal of Economic Perspectives, vol. 32, no. 1, 2018, pp. 3–30.
- Explores housing supply dynamics and their long-term impact on housing prices.
- U.S. Federal Reserve. “The Housing Bubble and its Implications for the Economy.” Monetary Policy Report to Congress, July 2008.
- Provides insights into the 2008 financial crisis and the housing market’s role.
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