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In a previous article, I talked about buying a home with my parents and how this really jumpstarted my financials. I still remember my realtor congratulating me on “the biggest investment that I’d ever make” on the day we closed on my house. I thanked her and took the keys, thinking I had made the wisest decision of my life.
My Home “Investment”
At the time, the housing market was on fire, and I thought my decision to buy a home was a no-brainer. Since I had bought brand-new construction, I had actually put down a contract on the house in December of 2003 but didn’t settle until mid-June of 2004. My house had risen in value by more than 15% in just six months, with no end in sight. I think at the very top of the market that my model ended up selling for 50% more than what I paid. Then obviously the housing crisis hit, and my paper gains evaporated.
Looking back, I’m glad I made the decision the buy my house. But, I don’t think homeownership is nearly the slam dunk that realtors and others make it out to be. In some ways, I feel like the American Dream of getting married early, buying a house and having a children is a picture-perfect ideal that people get swept into.
Type in “home investment” into Google, and you’re littered with the benefits of homeownership and why renting is the worst thing that you can do. While I am a big fan of owning your own property, I realize that it doesn’t always make sense for everyone.
According to the data, I bought at the absolute homeownership peak. In Q2 of 2004, homeownership peaked at 69.2% in the United States. Since then, homeownership has retreated steadily and now stands at 62.9% for the end of Q2 2016.
As you can see above from the Census bureau data, homeownership continues to decline each quarter since 2010. Based on this data, if you’re thinking about getting into the rental property market, it would seem that you’d be in the middle of a bull run. Who knows how much longer this will continue, but the data at least suggests that more people are moving away from homeownership and towards the flexibility to rent.
On a side note, one of the things that I’ve never understood is why the US offers homeowners the opportunity to write off mortgage interest. I know the principle behind it is to encourage homeownership. However, if we look to our friends to the north, Canada does not offer mortgage interest deductions on tax returns, and their homeownership is virtually the same at 67.6%, if not higher than ours.
My Wise Friends
When I bought my house, I knew that I would be in my property for the foreseeable future. I had just started a job and was really happy with the location. But, most of my friends rented because they knew they didn’t want to plant roots in this area.
It was a smart move for them, as I unfortunately bought towards the top of the real estate market. In the twelve years that I have owned my home, it has only gone up by about 21%. That means on average, my house has appreciated by 1.75% per year for the last twelve years. In contrast, the S&P 500 has returned 7.65% with dividends per year over the last twelve.
Home as a Savings Account
One of the questions that I continue to ask is why is a home considered an investment? I think a better way of looking at homeownership is a forced savings account. Think about it for a second. The current interest rate on my online bank account is 1%. My appreciation in the home that I live in is 1.75%. There’s not much difference between the two.
In a couple of years when I sell my home, I don’t plan to live in a home that costs substantially less. If anything, I will probably pay a little bit more since we have a growing family and would like a little bit of land for the kids to run around.
Staying Put for the Long Haul
I know a lot of people say that they will buy an expensive home now and then downgrade in the future when a more modest home makes sense for them. That way they can utilize the proceeds that they make from selling the house. This is great in theory, but I don’t think it always comes to fruition.
Most of the people that I interact with love being close to their families. My grandma has lived in the same house since 1965, my other grandma since the early 1980s. They have no plans to ever leave these homes to subsidize their retirement. My parents have told me that they never plan to leave their home. Maybe this has jaded me, but looking at homeownership as a retirement savings account has never been something that I’ve considered.
What do you think? Do you think a home is a good investment? Do you plan to fund your retirement with your home? Share your thoughts below.