For generations of Americans, a home was not only shelter, but was part of their retirement nest egg. That was the genesis of the 30 year mortgage; you worked your factory job faithfully, raised your family and, after three decades, you were ready to retire with a company pension, sell your home, and move to a retirement village somewhere warm to live out the rest of your active senior years. Your home was a key component of funding that 1950s view of retirement — but for the vast majority of people today, housing is a poor investment.
It’s necessary to take a moment to clarify the difference between “housing” and “real estate.”
Even though housing has been a weak investment for decades, the visceral truth did not strike home for many until the housing market crash of 2006. Millions of people found themselves underwater on valuations of homes they could no longer sell at any price. The myth of your home as an investment died a horrible death, as hundreds of thousands left the keys in the mailbox and walked away.
It’s necessary to take a moment to clarify the difference between “housing” and “real estate.” One is a poorly-performing retail investment, the other is how fortunes have been made and lost. If you want to make money in real estate, you don’t buy a single family home in an upscale suburban neighborhood; you buy an apartment complex or a strip mall. One is a business, the other is where you live.
Here are five reasons housing has been a poor investment for retail buyers since the 80s:
People tend to remember only the top-level numbers in housing. They paid $150,000 for a three bedroom, two bath house, and sold it 10 years later for $175,000 — and think they made a fortune. What they don’t account for are the ravages of inflation. Adjusting your home’s value for inflation will trim quite a lot off the bottom line.
Another huge housing-related expense that tends to get swept under the rug is ancillary costs such as taxes, insurance, and maintenance. In our example above, suppose the owners had to put a new roof on that house. According to CostHelper.com, the cost of new roof averages from $11,000 to just over $17,000. Now deduct that expense from the theoretical $25,000 the homeowner made in the example. On top of that, add up all the little things you buy at your local big box retail store to fix and upgrade things in your home and maintain the lawn. How’s that $25,000 over 10 years looking now? Older homes fare even worse when it comes to calculating ancillary costs.
When you buy a home these days, a bewildering number of players have their hand out. Typically there are two real estate brokers and a closing attorney, along with the state, county, and city government. There are commissions, fees for document preparation, closing costs, and recording fees — many of those at both ends of the transaction! That doesn’t even address fees like deposits to turn on water and electricity.
People divert a huge chunk of their savings and income into housing, money they could have invested elsewhere and made a positive return. Home prices generally appreciate around 2.2% per year, which is barely ahead of inflation. Last year the US stock market returned around 14%, and the long-term average is 7 -10%, handily beating inflation.
Cornerstone Wealth Management analyzed 40 of its client files to calculate the financial impact of owning a home versus selling it and renting. Renting instead of buying a home worked out in their client’s favor 100% of the time.
Of course in a market as complex as real estate, there are always going to be local hot spots where a few retail buyers luck into fabulous returns. There are people who get lucky at the casino as well, but you wouldn’t want to pretend that slot machines or the blackjack table are investments.
The real estate industry would like you to believe that a home is an investment for most people, but separate out the emotional components, and the sad truth is the majority would be further ahead renting or exploring alternate housing options.