Is Buying a Home A Good Financial Investment?
Do you consider your home as a place to live or as an investment asset? Some people we speak with about financial and tax planning tell us they intend to purchase a larger home as an investment.
If you think this way, you are not alone. A recent Gallup Poll indicates that most Americans believe their home is a great long-term investment, even outperforming stocks, bonds, and gold.
The Truth About Viewing a Home as an Investment
We believe that buying a home is a good idea to support the life style you want.
Robert Shiller is a Noble prize-winning economist and considered one of the world’s leading experts on the housing industry. Shiller does not see a single family home as a viable long-term investment vehicle. In an interview with Motley Fool*, he reports that home values in America:
• Declined for the first half of the 20th century, when adjusted for inflation.
• Fell by nearly $7 trillion from 2007 to 2011
• Are unlikely to meet or beat future stock-market earnings in the future
• May very well decline over the next 30 years, as home preferences and demographics change
Home Purchase vs. Stock Returns
As the Motley Fool* article reports:
“Say you and I both have $250,000. I buy a house for $250,000 cash, and you rent a house across the street for $1,000 a month and put $250,000 in the S&P 500. After 20 years, I’ll have a house worth $200,000 in real terms, and you’ll have a portfolio of stocks worth $330,000 adjusted for inflation (assuming the market’s average real rate of return, and a 2% inflation rate on my rent payments). The difference between those two amounts is the opportunity cost of owning a house (and I didn’t even include taxes, repairs, or insurance)…. [This] shows that the decision to own can be more about lifestyle and stability, not financial returns.”
By all means buy a home you like in the neighborhood where you want to live; but do not view your home as a long-term investment asset.
Home Purchase vs. Tax Minimization
Also, remember that you are purchasing your home with post-tax dollars. If you place a significant down payment on the house, at the end of the year, you will owe money on that down payment. You can deduct some elements of a home purchase, such as origination points (spread over several years) and mortgage interest rate (with a home loan value limit of $1 million). You cannot deduct the entire purchase from your taxes.
* Source: Morgan Housel, The Motley Fool 9:30 a.m. USA Today May 10, 2014