Buying A Home Is (Mostly) Not An Investment

Brunching with friends over the weekend, the conversation gradually turned to local real estate, as it is wont to do among the late-twenties, early-thirties urban professional crowd. The hosts were heading out to a series of open houses, looking at everything from fixer uppers to new construction. “You’re so lucky you bought a few years ago,” they told me and the other home-owning couple of the group, “Buying a home is just so unaffordable now.”

I live in a bonkers market. For those uninitiated to the current whims of coastal, big city home purchasing, here’s a taste of what’s going on out here: Single family homes in my area start at $1MM and go up from there (unless you’re okay with a teardown or fire damaged property, which you can probably buy for a cool $700k). For any property, especially at the “starter home” bracket, you’ll end up in a bidding war with at least five other dual high-income couples, usually one or both partners in tech. Homes last one weekend, two at most on the MLS unless there’s something seriously wrong with the property. Cash buyers routinely put in offers hundreds of thousands of dollars over asking price without inspection contingencies.

Because demand outstrips supply, since we bought our home in 2015, we’ve seen a consistent 5-6% YoY increase in our home’s value. From purchase until now, our home value has jumped just under $200k in three years. You would think, given that kind of increase, that I’d think home ownership is a wonderful investment, right?

Methodology

I decided to crunch the numbers. What if all the money I have dumped into my home over the years had gone into the S&P 500 instead? Is my home equity more than what I’d’ve had in cold, hard, liquid cash?

In my analysis I took into account all housing expenses including: rent, mortgage, property taxes, insurance, repairs, and the federal and state income tax implications of home ownership. I did not include the impact of my solar panels— i.e. none of the cost, income, change in utility costs, or increase in value to the home– since I think of that more or less as its own self-contained thing with its own payback period. I assumed in my calculations a 3% yearly rent increases under the rental scenario. I discounted my home value by 5% to account for transaction costs upon sale; I also discounted the rental scenario profit numbers by 10% to account for LTCG.

Results

I’m not going to share all my numbers, but here’s how Renter YAPFB and Owner YAPFB do in the relevant time frame at a high level:

In 2015, Owner YAPFB spends a tidy six figure sum for a down payment, delayed maintenance, and repairs on her brand new (to her) condo. The value of her home shoots up after she does mid-five-figure remodel: replacing the roof, new plumbing and electrical, flooring, foundation work. However, most of that equity is eaten up by the transaction costs of buying a home and the four months she spends paying both rent and a mortgage while construction was happening. Cumulative net benefit of buying a home: -$5,777.62.

In 2016, Owner YAPFB thinks her spree of wallet-emptying home maintenance is over when her eight-year-old furnace breaks down in the middle of winter. While she could go with a cheap replacement, she decides to install a heat pump so she can have central air conditioning in the summer. This eats up a lot of her equity gain from increasing home values. Cumulative net benefit of buying a home: $493.24

In 2017, things have mostly stabilized on the home owning front. Owner YAPFB actually spends a little less than Renter YAPFB on housing costs for the year. However, because the stock market is also going gangbusters, the increase in Owner YAPFB’s home value with leverage barely matches Renter YAPFB’s profits from the market. Cumulative net benefit of buying a home: $3,728.56.

So far in 2018, both Owner and Renter YAPFB have been sitting on their laurels, while the stock market has been jutting in fits and starts, the local real estate market continues apace, though who knows how far it can go? Cumulative net benefit of buying a home: $41,266.57.

Conclusion

Even in a very hot market, it’s only really clear that buying has been better financially about three years into ownership. Yes, I’d be ahead ~$40k if I sold now, that’s a far cry from the $200k top line number I started with.

Now, assuming I’m done front-loading my repairs for a while, home ownership should cost a little less than renting by a couple thousand dollars a year. In addition, I’m at the point where I should be able to “pocket” the increase in home values rather than siphon it off into yet more repairs. So assuming (1) home values continue to increase, (2) the leveraged increase in home values outpaces stock market growth, and (3) nothing catastrophic happens in terms of maintenance, my home may turn out to be financially a “better” decision than non-ownership.

But given the unsure nature of the financial situation, I cannot say the money is the main source of value I derive from home ownership. For me, the big things are more qualitative than quantitative: stability in knowing where I will live, lack of worry about being priced out of my home due to rent increases, being more integrated with my local community (homeowners have a very outsized voice in local politics), and being able to customize my home to my aesthetic and comfort preferences (paint on the walls! central A/C!). All these qualitative benefits come with their own costs (liquidity, various worries about climate change on an ocean-adjacent city), but for now I feel they are mostly worth it.

Have you calculated the rent versus buy financials on your home? Why do you (or don’t you) value home ownership?

Advertisements

11 thoughts on “Buying A Home Is (Mostly) Not An Investment

  1. I did rent vs buy estimates before purchasing, but haven’t tried to do any since. I think the biggest thing I value is stability of the monthly cost. In some rent vs buy articles, people seem to exaggerate the frequency in which renters are forced to leave their rental – but when it happens, it can be hugely traumatic and expensive. Property tax increases are limited in CA, so costs are truly pretty stable, aside from maintenance, which can be carefully budgeted for.

    Like

    1. My view on homeownership used to be that it was a hedge rather than an investment, similar to your note about the stability of monthly cost. After a couple years, though, I feel like the maintenance has been sufficiently bursty and expensive that PITI feels way more like a floor than a ceiling.

      Then again, I think part of all that is because fiance and I are not at all handy. If we could DIY more things, I think it’d feel less overwhelming to work repairs into the budget. As it is, I save about 0.5% of our home value each year to supplement our emergency fund for house stuff based on some back of the envelope calculations of expected lifetimes for the big systems.

      Like

      1. I feel like, over the life of the home, maintenance will be somewhat more predictable. Maybe I’m just hopeful! I think many people have a couple of known big things to do when they first move in, then there is usually a surprise thing or two.

        Like

  2. I made a chart recently of condo equity versus investing the down payment and all mortgage principal only payments in Vanguard Total World Stock Market index fund. My condo has appreciated an average of 10% per year for the last six years, which is the main reason that condo equity won out. Investing was a pretty good baseline though. The stability of monthly cost is really nice though – we are still paying $2000/month for PITI+condo on a centrally located two bedroom apartment when renting a similar place would cost $3500-4000/month in our neighborhood. We budget about $200/month for maintenance which should hopefully be enough when all of our appliances start to die off. I don’t think we would have gotten priced out of the rental prices since my spouse’s income has grown so much, but we are not big into moving, so the stability of ownership works really well for us.

    Like

    1. Wow, I think our real estate market is tough and then I hear about what other people are facing! 10% YoY increase in home values? That’s bananas (though, obviously, great for you guys).

      When we bought 3 years ago, our PITI+condo was around what we could expect to rent the place out for, i.e. ~$2000/month for a 2-bed. Now rents for comparably nice places are probably in the $2500-2750 range (though you can still find $2250 less nice places). We’d have probably gone for a cheap place with a small-time landlord and coasted on below-market rent increases for as long as possible if we went the rental route.

      Like

      1. It’s great for us, so long as we don’t want to buy a house! When I bought the PITI+condo was comparable to what you could rent a 1 bedroom for (~$1700/month), but I got a bigger place, which was pretty sweet! I do wonder if we would have moved neighborhoods rather than pay $3500/month for rent though.

        Like

  3. I have several thoughts on this topic:

    1) I compared my costs of ownership to the actual rent being charged at the last place I rented for the first several years, and I basically came out barely ahead except for the first year (closing costs) and the year I refinanced (closing costs).

    2) However, now that the house is paid off, even though I live in a high-property-tax state, I am way better off than renting. Rents are just horrifying. I try not to think about it, but I think I basically could not afford them. (Okay, not as horrifying as yours, but my income is pretty mediocre.)

    3) We also have too much demand in my city; housing prices have gone up way faster than my income ever did, stagnating only one year during the great recession. Basically, my house value tripled over the period when my income doubled. And that was before the gentrification started.

    4) Except for the first two years and the last year, I did not pay extra into the mortgage because I figured the stock market would pay more. But this turned out to be the period when the stock market was the same ten years later. Dang. Similarly, because interest rates were at historic lows I got a fixed interest mortgage. That also was a mistake; that amazing low interest rate was 8.something%. And I refinanced at 6.625%. Ha. Oh well.

    5) Also I now want to do some pretty serious renovations. I want a dishwasher, you know? And covered parking of some kind–for two cars! And I want the washer out of the kitchen so I can have more counters and cabinets. So, not crazy expensive renovations (relatively speaking), but not just paint and door-refacing either.

    6) I like home ownership as a form of diversification. When I try to research diversification, everything says you need stocks AND bonds. Um, that’s only two things. If the market crashes, my investments are in trouble and my pension is in trouble. So it feels like this is a third thing. (And frugality skills are a fourth thing, and that’s pretty much all I’ve thought up.)

    7) As far as other factors: It turns out I hate gardening. Repairs are a wash–I don’t like having to pay for them and do them, but I do like that the important ones can actually get done if I want them to (and can afford it)–I don’t have to keep buying more buckets to catch the rain leaks or whatever. I like my location a lot–I used to think that if I got some richer-than-me husband, then I’d move into his place and rent out my place to students, but all my (richer) friends live further out. Because I’m in a single-family dwelling, I get to jump up and down (dance) or play the piano at any hour of the day or night, guilt free. And if I do get priced out of my house (values and thus taxes skyrocket too high), at least I will be able to sell and get a big pile of money. (Sadly, my house is still below average, so I wouldn’t be able to afford to buy any place else I like in my city, but that price would cover a lot of rent.)

    Like

    1. Wow thank you for the thorough response Debbie!

      1, 2, 6) Totally agree with you on the appeal of buying. When I bought, I though of my house as two things: a hedge against rising rents in the area since I knew I wanted to stick around here for a while and diversification from what seemed like an overheated stock market.

      I think my mind has changed somewhat on both those points, at least a little. My initial repairs were extensive so my PITI has felt more like a floor than a ceiling in terms of expense. And in terms of diversification, you can never really tell whether a single property is a good buy or not. I think REITs would probably be a better way to diversify into real estate, especially since it takes a lot of the emotional component out of it.

      3) I wonder how people who aren’t living in rapidly gentrifying/rising cost feel about their homes. I feel like it’s easy to be optimistic about ownership if the value keeps going up, up, and up (our area bounced back from recession values very quickly and never really dipped all that much anyway).

      4) I’m both really glad that I was able to lock in a 3.25% mortgage and also really frightened that means my property values are going to start tanking as the market prices in the upcoming Fed hikes.

      5, 7) Man, do I hate gardening too. Luckily my neighbor loves it and takes care of our shared back yard. On the washer thing, I actually kind of want to put ours in the kitchen (currently it lives in the basement and we’re on the second floor). But, yes, dishwashers are magical beings and I can’t believe I never used one until I was in my twenties. Major game changer, would recommend.

      Also looking at my response here I feel like such a negative nancy about home ownership, haha. Probably the result of performing a lot of delayed maintenance during my break.

      Like

      1. Right the diversification thing is pretty risky. But it’s instead of paying rent, so it really is a different thing.

        And I agree, when repairs pile up, it’s no fun. I learned to just put a certain amount into savings every month. Then I only feel bad if I draw down that account to close to zero (or beyond), which hasn’t happened yet. I had to do a few things at the beginning, too (new roof, weatherization, plus get a fridge and washer–did talk the owner into leaving the stove that was there).

        Before I bought this house, I used to move all the time, so I’d have different annoyances at each place. It’s been disconcerting to have the same annoyances for so many years!

        Like

  4. I do not consider my home an investment. I have had to deal with terrible landlords in the past, so, I wanted to buy.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s