For most of us, owning a home will be the biggest investment you have. But is it really a good investment, or is it just a place to lay our heads at night? You have to live somewhere, and as I like to say, “you can’t take a brick out of your house to put food on the table.” Many people hold the belief that a house is a good investment. And I agree it is a worthy goal. But the desire for owning bigger houses is widespread, especially among high income earners. So, let’s explore the numbers by looking at the S&P Shiller 20-City Composite Home Price Index. Over the last 10 years after the recession, the annual return of the index is 4.21%. If you go further back to 2000 to include the Real Estate run up and bubble, the annual return is only 4.11%. In comparison, the S&P500 over the last 10 years averaged 10.99%.
You might say, 4.21% is not bad. It’s better than inflation and less risk than stocks. But the return is misleading, because houses require continual upkeep. Expenses like roof, water heaters and furnace repairs, will reduce your potential return. And mobility issues could come into play. If you have to move for a job and the housing market is in a recession, you might find yourself S.O.L.
But there are good sides to home ownership. Depending on your tax situation, you might be able to deduct your mortgage interest. You don’t have to ask a landlord when you want to paint a room. And not having a housing payment in retirement with a paid-off mortgage could be huge. But unless you have great timing on the purchase, you will only see a modest return on you home investment. And saying your large home purchase is a great investment, in most cases, is just not the case.