Is Your Home a Good Investment?

Is Your Home a Good Investment?

June 23, 2021

In 1958, a young, industrious Nebraskan and his wife purchased a home in their native Omaha for $31,500. That $31,500 – equivalent to about $285,000 in today’s dollars – was a huge investment at the time, but it paid off. More than 60 years later, the man and his wife still live in the home, which has gone up approximately 20X in price to an estimated value of $652,000 today.

That man is legendary investor and multi-billionaire Warren Buffet. And that impressive looking return pencils out to a compound annual growth rate of 5%.

Buffet did fine on the purchase of his home, but he became ultra-wealthy by investing in America’s greatest companies.

There are many great reasons to own the home you live in, but it turns out earning a superior return is not one of them.

Of course, I’m not advocating renting instead of buying a home. There are pros and cons to both. And this discussion does not include cash-flow producing rental properties, multi-family rental units, and even commercial property which may be an important part of a well-balanced portfolio for high net-worth individuals.

However, too many people believe that their primary residence is a great investment, even though the data does not support this.

I wouldn’t be surprised if this assertion garners some push-back. Afterall, owning a home is as American as baseball and apple pie, and the residential real estate market is hot!

Home prices nationally increased 13.2% year-over-year in the most recent reading from March.

U.S. Home Prices Rally On

Source: Bloomberg

Surging demand is coming from ultra-low mortgage interest rates, scarce inventory, a post-pandemic mobile-friendly work culture, and demographics.

According to Glenn Kelman, CEO of Redfin:

"Inventory is down 37% year over year to a record low. The typical home sells in 17 days, a record low. Home prices are up a record amount…to a record high. And still homes sell on average for 1.7% higher than the asking price, another record.”1

Millennials, the largest cohort of the US population, are finally settling down. They currently account for 37% of home purchases.

Share of Buyers and Sellers by Generation

As wealth advisors, we’re often asked, “Is your home a good investment?”

From a pure dollars and cents perspective, not really.

However, I will add that from an emotional perspective, the answer may be yes.

Historical Home Appreciation

There’s a popular and persistent myth that residential real estate produces incredible returns over time. The data shows this has not been the case.

The average annual growth rate for US residential real estate since 1975 has been 5.03% per year.

Home Price Index

The average annual rate of return for the S&P 500 over that same time has been 9.09%.

So, if you compare the growth of real estate with US stocks, home prices have lagged considerably.

While the 5.03% gross rate of return for residential real estate has been fine, real returns (net of inflation) have been poor.

Robert Shiller, the Yale economist and Nobel prize winning housing expert says, "To me, the idea that buying a home is such a great idea is just wrong. (Prices) may very well decline for the next 30 years in real terms." According to Shiller, real inflation adjusted home prices went virtually nowhere between 1890 and 1990.2

If we look at median home prices between 1951 and 2020 on an after-inflation basis, home prices averaged just 1% per year.3

Median Historical Home Prices

The Not-So-Hidden Costs

“A home is a large liability masquerading as a safe asset.” – Morgan Housel

We all need somewhere to live, right? The most important factor in owning a home should be that is provides valuable shelter and stability, not that it is an amazing investment.

Homes are a cash black hole, with persistent costs most people fail to factor into their true rate of return calculations. There are property taxes, mortgage interest expense, insurance premiums, and ongoing maintenance costs. Then there are upgrades and remodel expenses.

Another issue is that a home is not a liquid investment. It cannot easily be converted to cash. In fact, to convert it to cash you must incur hefty transactions fees such as realtor commissions, escrow charges, title fees, and transfer taxes. The typical period to list then sell a home and access your proceeds is often 60-90 days.

It’s not cheap to own a home, and there’s an incredible amount of financial friction to buy or sell one.

The Real Investment

The real and substantial gains of home ownership are found in the intangible benefits.

‘Home is where the heart is’, and the biggest advantage to owning a home is not financial. Instead, it’s in the memories made inside those walls where you gather with friends and family to share laughs, cook memorable meals, raise your children, and experience the community of a neighborhood.

A home is a place of comfort. Humans seek security and there’s tremendous psychic benefit in knowing you a roof over your head and a safe place to live.

Bottom Line

1. Recognize your home is primarily a shelter, a lifestyle decision, and a memory factory. If you one day make money on the sale of your home, consider it a bonus.

2. Your home is giant ongoing expense.

3. Life happens, so take out a home equity line of credit preemptively. It usually costs nothing to have one available, yet it’s there to tap into if you’re ever in a liquidity crunch.

4. Don’t buy a house unless you’re going to own it for a while. “If you’re not going to be in a home for more than 3 years then consider renting,” says Chris Bang, owner and mortgage banker at Pacific West Lending in Sacramento. “At historic appreciation rates, in most cases, you won’t make up for the transactions fees.”

I realize that this analysis of real estate is not all encompassing.

I understand real estate offers leverage by allowing borrowers to gain a larger asset with a smaller investment using a mortgage.

I understand mortgage interest can be tax-deductible for those that itemize on their tax return.

I also recognize that buying rental properties can be a great tool for generating consistent cash flow.

And for those just starting out, or for the average middle-class family who hasn’t committed to a disciplined savings program, buying a home can act as a forced savings plan.

But the research proves that even when factoring in all of those variables, your home is likely not a good financial investment.

The decision to own a home is about more than dollars and cents. It’s about a sense of pride, security, and timeless memories - the things money just can’t buy.

That, I won’t argue.

Happy Planning,



Sources/Further Reading