A couple we know moved to a new house recently. They sold their old for a little more than twice the price they originally paid. Doubling your money sounds like a great deal, right?
Not so fast.
To determine if the house was a good investment we need to make some calculations. They originally bought their old home about 33 years ago. That means that the return on their investment was just 2.4% per year. To put it in perspective, 33 years ago CD rates were around 10%. Viewed strictly from an investment perspective, they could have made a better return on their money if they had bought a CD. And that’s to say nothing of maintenance and upkeep, costs not associated with CDs.
On the other hand, you can’t live in a CD.
How about investing that money in the stock market? Over that same period the S&P 500 grew 8.5% annually. That means that every $100 invested in the market 33 years ago would have grown to $1476!
The reason that so many people think that their home is their best investment is that they don’t sell their home very often. As a result, they look at what they paid and what they sold it for. If they held it for many years, it usually looks like a big number, and it is. But when viewed strictly as an investment, the annual growth rate is small compared to the alternatives.
As we alluded to earlier, home ownership also involves many other expenses. There are property taxes and insurance. Homeowners know that repairs and maintenance are expensive and never ending. After all of the expenses are taken into account, the real return on home ownership may be even less that our earlier calculation.
But a home is much more than an investment. It’s a place to live, a place to raise a family, a place to call your own. A home is a refuge from the rest of the world. The alternative is renting, wherein you often have more flexibility and are not on the hook for all of the repairs and maintenance. But it also means that your monthly payment to your landlord is not going into equity that home ownership provides.
We are homeowners and advocates of home ownership. The point of evaluating the true value of the home as an investment is to bring reality to the financial aspects of home ownership. It’s also a warning against investing too much of our resources in the family home, making many people “home poor.”
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.