I repeat, your home is a lousy investment
Emotional factors just aren’t part of the equation
Home must be where the heart is, because my Feb. 19 column on homeownership being a lousy investment annoyed readers mightily. I may as well have spit on motherhood, apple pie and the girl next door.
But my basic point remains true. Readers’ biggest gripe: What about rent? Overwhelmingly, folks believe owning is cheaper than renting. And they believe that buying, via mortgage payments, transfers “wasted” rent into an investment. Wrong and mostly wrong.
First, almost none of your monthly mortgage payments apply to equity for many years. In my column, I used an example of owning a home in San Mateo County, Calif., from 1995 to 2005 because it was among America’s best-performing regions. But in those 10 years, only 16% of your payments would have morphed into equity. Most of that money would have slid down a rat hole, like rent does — only different because of its slight interest deductibility under today’s tax rules.
Second, while many readers don’t seem to want to believe it, renting a comparable house is almost always cheaper.
The U.S. Census Bureau reports national and local costs for renting and owning homes at www.census.gov/
quickfacts/fact/table/US/PST045217. Nationwide, from 2012 to 2016, the average median monthly gross rent was
$949. That’s rent plus utilities and fuels. Comparable homeownership via mortgage plus taxes and other costs was
$1,491.
In every state, as well, owning costs more than comparable renting. With the San Mateo location, the median spread was $3,102 vs. $1,830. In Cincinnati, it was $1,239 vs. $662. In Houston, $1,492 vs. $898. And Atlanta: $1,744 vs. $998 —
43% cheaper.
That said, I erred in my earlier column, understating the return of owning a home in San Mateo County in two ways. In haste, I pulled data from a wrong column using 15 years of mortgage payments instead of 10. This understated returns by 1.5% a year. I also erred in calculating the interest balance and the total mortgage payment amounts becoming equity over the decade involved. This understated returns by an additional 6.2% a year. USA TODAY has run a correction.
Still, perfect timing in a perfect topof-the-nation location generated 10.8% annual returns (pre-tax), comparable with a 401(k)’s tax-deferred return over the same period with bonds at 8.2%, or U.S. stocks at 11%.
But most regions fared far worse than San Mateo. Booming Seattle’s median home price jumped 102% that decade, from $134,975 to $272,925. But after including all costs, owners gained only 2% annually, far worse than most “investments.”
Austin’s median annual returns that decade, calculated the same way, were -13.1%. Cleveland’s was even worse. A Cleveland resident in 2005 selling a home at the cycle’s peak would have lost it all — a cumulative 134% loss. A Cleveland renter who took the savings from cheaper rent and invested them in stocks through a 401(k) would have accumulated more than $45,000.
Another common reader gripe: Renters won’t invest any possible savings.
If you’re smart you will. But if you won’t, that still doesn’t make homeownership a great investment.
Others groused a decade was too short. But I picked 10 years because that’s how long the average homeowner holds onto his or her property, according to the National Association of Realtors.
As I said before, homes are wonderful. Owning means never worrying about eviction, rent increases or many fears readers cited. But those advantages are separate from investment wonders, despite what so many people fool themselves into believing.
When weighing buying, “it’s a great investment” shouldn’t be on your prosand-cons list.