Updated: Feb 10, 2021
I've been mulling over this homeownership thing recently. I'm struggling to see how it's really a solid return on investment in the long run. If you take out mortgage deductions, is there really anything to it from an investment perspective?
I've read many articles that praise the value of homeownership. It's the biggest investment that most people have in their lives these articles suggest. Being a home owner is a good way to secure forced savings. Paying down a mortgage apparently leads to good habits. It makes people budget, and be financially responsible enough to plan out mortgage repayments.
That may all be true, but being a homeowner is a massive sinkhole on you wallet as well. All these years as a home owner, it seems like there has been one expense after another such as lawn maintenance, seeding and sodding, house painting etc. Not to mention the bevvy of annual projects that will keep us busy until our young kids are off to college. After you add up annual insurance costs, and state property taxes, home ownership really does seem like a terrible financial decision.
Of course, one of the biggest advantages with owning a home in the US is the mortgage deduction that you get for the interest payments you make. That's a nice tax break. I don't disagree. But I'm not sure that it makes up for the endless stream of other costs that come your way with owning a home.
Perhaps if you are over on the west coast of the US, its an different story. It seems like over there, real estate prices increase some 8-10% annually subject to which part of the area that you are in. Over here in the North east, in my area anyway, prices have averaged a rather anemic 4% annual increase over the last decade. When you net out inflation, and factor in all the other costs that go into the upkeep of a home, I think that's hardly better than breaking even.
The last couple of months have shown me just how random and extreme some of these expense can be. We've had minor problems with our air conditioning system, which was fortunately relatively painless and not so costly fix. And more recently, we've discovered that some squirrels have taken a fancy to periodically squatting in our attic, and having acorn rolling tournaments in the middle on the night when we are deep asleep! Annoying I tell you. The cost to evict these critters and remediate the damage is a whopping $3k. How's that for a nice, unanticipated home ownership expense.
Now, I think there are a number of legitimate reasons to own a home. Security and pride of ownership are likely the major ones. But never confuse those with the home being a productive investment. I'm now starting to appreciate the logic behind renting and investing whatever you save. While that sort of move just wouldn't make sense for us, if someone is able to rent and invest, I think its highly likely they may well come out financially ahead of the homeowner, all else being equal.
Even for those areas that have experienced above normal price returns, such as in the west coast, I'm not sure that banking on a strategy of 8-10% plus price appreciation is a wise move. Ultimately price growth should be a function of the amount by which rents increase, which will be a function of wage growth. Expecting anything above that long term is just hoping and speculating.
In any case, I'm at least grateful that we went into our home purchase not expecting to make a massive windfall when we are done. In fact, if I can come out at anything better than a 2% annual growth, net of inflation, I'll consider it met our objectives.
In the meantime, I've got some squirrels to take care of!