The contrarian view- your home is not an investment (at least, it’s not a good investment)
Very though-provoking article from the Wall St Journal this past week - Why Your Home Isn’t the Investment You Think It Is. Writer David Crook raises a number of reasons why it may not be appropriate to think of your house as a great investment, maintaining that people do not accurately calculate the returns on their homes– and if they did, they would find those returns to be unacceptedly low. Based on these misconceptions, people justify ‘maximizing their home investment’ by purchasing the largest house they can possibly afford, believing this will result in a larger gain.
A few of his reasons to dispute the crowd’s wisdom:
- Real estate recessions occur, and could cost you all of your profits and then some if one were to occur when you want to sell. Some recessions endure for years, limiting your ability to wait it out.
- It’s bad portfolio planning to put too many of your eggs in any one basket. If 60-70% of your net worth is tied up in your house, you are carrying an acceptably high amount of risk.
- Unlike other investments (stocks), homes have very high carrying costs. Even when compared with the annual fees on mutual funds and ETF’s, homes can come out as more expensive. Taxes, bills, fees, maintenance all add up. People tend not to include these expenses when they calculate their profit on sale.
- Further, capital improvements can be very expensive, and usually are not fully recouped at sale, which may not even be until years later.
- Rent vs. own? Remember that owning is expensive to even get into- the real estate purchasing process is very inefficient, with broker’s fees, mortgage points, title searches, and all kinds of other miscellaneous charges which increase the cost.
- Appreciation may occasionally take off in certain areas, but that’s entirely dependent on where you live. It doesn’t do you any good that prices are soaring in California if you own in Iowa.
- Your profits on sale aren’t really profits, in that you don’t get to keep them. That’s because you have to live somewhere, so you’ll just wind up reinvesting your profits in another home… and meanwhile, home prices have been rising, so it’s going to cost you.
Interesting article, and worth thinking about. I don’t think he even raised the issue of the time value of money, ie. the downpayment you’ll eventually reclaim at sale will be worth a lot less to you due to your opportunity cost.
