Is a home really a good investment?

How many times have you heard that a home is the best investment you could ever make?

David Crook of the Wall St. Journal disagrees, and wrote an article explaining why your home is not the investment you think it is.

It rejects the common premise that a home is a good investment and he has compelling statistics to back up the premise. Of course, Mark Twain’s quote about statistics comes to mind, but it’s still a very interesting take on owning a home, especially with the recent increase in home prices around the country.

This sums up the gist of the article.

When most homeowners figure their returns, they don’t do much more than subtract the price they paid from the price they received. Then they come up with a really big return because they paid only a 10% or 20% down payment. So they figure they made a huge “profit.”

But they didn’t. That’s because the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation.


 (Post a comment) | Comments RSS feed
  1. Dan, you’re right, a home is NOT an asset until you own it (no, “own” does not mean “paying for”).

    A home is a LIABILITY. You MUST pay a mortgage payment each month, you must pay insurance on it, you must pay taxes on it, you must pay for upkeep, etc. When you add all that up, how much is it “worth” minus how much do you “owe” on it? If that amount is Negative (which most are), it’s a liability, you owe more than you own.

    At least until your home is “worth” more than you “owe,” at that point, theoretically, it becomes an asset.

    Realistically, unless something is bringing you actual income, it’s still not an ASSET. Which means that it’s only an ASSET on the bank’s books, because your home is bringing them monthly income.

    Comment by Joe Levi on March 21, 2007 @ 9:27 am
  2. Have you read Rich Dad Poor Dad? He talks about how assets aren’t really assets if they’re not actively making you money.

    Comment by dan on March 21, 2007 @ 9:37 am
  3. Everyone needs somewhere to live. Someone has to pay for that place, and they can either rent or own. The “traditional” (read, last 50 years’) thinking is that a home is an “investment”. The referenced article, and this article, and all related articles, correctly point out that this increasingly not the case. To all visitors to this site, I now share that this will never be the case. Here is the reasoning:

    1 As I said, everyone needs a home. Thus you must spend something. Rent vs own.
    2 If renting is a loss for the consumer (as an investment), then home ownership only need be *less* of a loss for it to be preferable.
    3 Thus, the price for ownership will tend towards the price for rent, plus the entrepreneurial cost to the home owner:
    4 These costs are things such as maintenance, risk, insurance, taxes, and opportunity cost of not investing elsewhere.
    5 As housing is a capitalist industry (read: profit-managed businesses) like any other, the implied equation becomes very precise in aggregate and statistically predictable over large samples.
    6 Principles of supply and demand teach us that a capitalist enterprise will move its capital to where it can achieve the greatest return. If home ownership yields 6% profit and pet food only 4%, investors will move their money around and underbid each other until the risk-adjusted return for both is 5%
    7 Thus, over time, the profit from home ownership = the profit from home renting = the profit from any enterprise (in the early 21st century this was 2-3%).

    In plain english, you expect housing as a whole to be as profitable for the owners as any other industry, with caveats about how well it is being managed. Should you buy a car or rent a car? Same thing.

    All standard axioms apply about symmetrical information, arbitrage, homogenous product, etc etc. So can an *individual case* make a large profit? Sure! But, like all investments, you have to be savvy to find it. Most investors would have a hard time picking next year’s winners, let alone a winner for 30 years from now. Ergo, you are lucky to break even in relative terms.


    Is a home a good investment? Not really (In the long term nothing is, as all profits tend to the mean and downward). Should you buy one? It makes no difference whether you do or not – it costs the same either way, *provided you invest what you save by not buying*.

    HYPOTHETICALLY, if there is major demand increase (population/wealth growth) and a major supply decrease (government outlaws home construction on new land, for example), the strike price could go through the roof. I’m just talking economics here, not making assessments about the future – that’s for you to speculate.

    As an exercise to the reader, please contrast my comments about unprofitable-as-investment “home ownership” with “land ownership”, which will always be vastly profitable-as-investment (and thus why our society does not allow true land ownership).

    Comment by Stephen Goodman on May 13, 2011 @ 6:20 pm

Comments are closed