With skyrocketing appreciation, homes look like a smoking hot investment. Warren Buffet just listed his California vacation home for $11 million. Considering he purchased this home in 1971 for only $150,000. That’s an annual appreciation rate of 9.79 percent! Regular homeowners may not realize Buffet’s gains, but they’re still seeing healthy appreciation. Does that mean homes are good investments?
Not really, says financial writer Liz Weston. People think homes are a better investment than they really are. If in 1971 Buffet placed that $150,000 in the stock market, he’d be $14.5 million richer today. Even so, Buffet’s appreciation was like wining the lottery. There’s no way to predict which markets will be strong over time. Most homeowners fare much worse, barely keeping up with inflation.
Why homes aren’t good investments
1. On average, homes don’t match the stock market (and barely keep up with inflation).
2. Unlike stocks, homes aren’t liquid. Buying and selling homes is slow and expensive in comparison to other investments.
3. Homes require maintenance to maintain value or they depreciate. When insurance fees, mortgage interest and maintenance costs are included, the real appreciation can be surprisingly small.
4. When selling a home, you still need a place to live. Unlike stocks, you can’t simply cash out and enjoy the profits. You must reinvest to live somewhere else.
5. Buying into a hot market is like purchasing a lottery ticket. No one has a good formula for predicting success because it’s gambling. In contrast, investing in stocks is buying ownership in income generating companies.
6. Large “investment quality” homes, otherwise known as Mcmansions have proven to appreciate less than older homes. Because of shoddy workmanship, unwieldy sizes and increased maintenance expenses, these homes are money losers.
7. Desired housing features change over time, especially the technology. Today’s great family home will be outdated in a few years. Fads come and go with surprising speed.
Thinking of homes as investments is a problem
Home ownership becomes counterproductive when buyers make decisions based on investment reasoning. Often buyers purchase too much home to maximize appreciation. In essence they willingly become house poor. These buyers sacrifice their family’s present wellbeing in hopes of future wealth that may not materialize.
Buyers often seek the “latest fads” and unneeded features in search of increased value. Sometimes this investment mentality unleashes an unrealistic faith in conspicuous consumption. The accumulation of meaningless stuff gets in the way of purposeful living.
These investment mindsets stray far from the true purpose of home ownership. Which is to provide a nurturing living environment for your family. Instead of investing for uncertain profit, invest in your family. Decide what your family really needs for financial, physical and emotional health, then buy the appropriate home.
Or as Harvard’s Alexander von Hoffman says – “Maybe we should rethink what it means to own your own home. It’s not too late. We could return to treating a house as a shelter for the family or a sanctuary in troubled times rather than as an ATM. We could think of it as a source of emotional security instead of a collateral security.”
Liz Weston: Are you buying a house or lottery ticket?
Denver Post, March 30, 2017
Patrick Clark: Mcmansions Define Ugly in a New Way; They’re a Bad Investment.
Bloomberg, August 23, 2016
Alexander von Hoffman: Home Values Are Down, and Not Just at the Bank.
Washington Post, July 20, 2008