Jonathan Rainer

It seems popular opinion about home ownership is that you are creating an investment for the future.  Nothing could be further from the truth, so let’s explore.

I first ran across this concept about a decade or more ago while reading Rich Dad, Poor Dad.  It’s a great read, and I highly recommend it. Robert Kiyosaki writes about his experience with his rich dad and contrasts them against his poor dad.

The core to the book emphasizes that Americans have traditionally bought into a lie about wealth and money. While there are a number of points made in the book, the one I want to look at is the idea that a home is an investment. Most of these ideas below are my own, but burst to light by reading Kiyosaki’s book.

The main myth centers around the fact that housing always appreciates. Over the past two decades we’ve seen dramatic increases in real estate. But, we’ve also seen a dramatic fall.  While falls in housing prices have always occurred, it is rare to see it happen the way it has in the past five years.

So, let’s look at the historical appreciation rate. I tried putting my hands on charts I’ve seen before, and couldn’t find them, unfortunately.  But, I have never seen a chart say that homes appreciate significantly more than the rate of inflation. This means that over decades, homes appreciate only as fast, or slightly faster than the rate of inflation. The highest I’ve seen covering 50+ years of real estate is a 1% annual return.  Some show less than inflation, but most were right at the inflation rate. Most of the differences were in how the data was calculated.

This actually makes sense, since if housing continued to appreciate faster than inflation, and faster than wage growth, then eventually more and more people would be unable to afford a home as the cost to purchase that home becomes too expensive.  So, market pressures will pull housing costs back down as we have seen since 2006.

The second factor to point out is the cost of a mortgage. Not all homes are mortgaged. In fact around 40% are owned without any mortgage.  Those that are face a serious cost.  It can cost around $4,000 for a $100,000 home to close with a mortgage. Now, add in the cost of the interest.  Over a 30 year mortgage, you pay about 70% of the cost of the home in interest, plus the cost of the house. Again, with our $100,000 house, and a 4% interest rate, you’ll pay $71,868 in interest over 30 years, and additionally pay the $100,000 initial cost of the home.

Now, people say that the home is appreciating.  Well, inflation has been roughly 3-4% annually.  Factoring out the present value, the future value would be $242,726 in 30 years at 3%. That’s still a gain over the investment of $171,868.  I could go into more details on why that gain is relatively small, but let’s be brief before your eyes glaze over.

Third, let’s factor in expenses. It’s been said that expenses on an average house run about $2,000 a year. Not a lot of money, but not a free ride like on a rental. Without even factoring that the maintenance costs keep going up each year, over 30 years, that’s an additional cost of $60,000.  So, after your interest payments, you’ve earned $70,858 on your house value.  But, you’ve paid out $60,000 in house repairs and that leaves you with $10,858.  Now, let’s take out that $4,000 in closing costs and you have just $6,858.

But, wait, there’s more! Your home is now out-dated. In appraisal terms, it faces obsolescence. If all your neighbors upgraded to meet new green energy options like solar or geothermal, or they upgraded to 5 bedrooms which is the new norm (30 years from now), or any of a myriad different changes, then your home is obsolete. You must spend tens of thousands of dollars to upgrade it.

Again, for brevity, let’s not factor in all the problems that could creep up like neighborhood blight, rising costs of energy, facing more rentals in the neighborhood than home owners, and a rash of foreclosures that prevents you from selling.

Look, I’m not trying to scare you out of a home. In fact, it is one of the wisest decisions you’ll ever make. Home ownership is tied to being more successful, happier, and your children will love that you aren’t scared of the marker on the wall causing your rental security deposit to disappear.  You can paint how you want, renovate like you want, and in single-family housing, be as loud as you want (well, almost).  And, when you rent, you don’t get a dime when you leave to go toward your next place.

But, the truth is simply that it will cost you more to own a home than you think. Yes, at the end of that 30 year note, you can cash out a hefty amount. If, and only if, you haven’t been faced with obsolescence. But, the final point is that you still need a place to live. And that will still cost you money.  Buying without a mortgage is the best choice since you can get a better deal, have lower closing costs, and no threat of foreclosure.  But, you will still need to renovate and maintain the house.

My gut tells me that owning a house long term costs about the same as it would to rent, even with the low interest rates we see today.  I would love to see statistics proving that, but I’m no statistician and stats don’t sell houses like I do.  It is definitely true if you continually move and never pay the mortgage off.  So, assume that you are purchasing a house for the peace of mind of having your own place among other reasons, not because it’s a good investment.

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