Home is not your “biggest investment”

In the world of real estate you often here people touting that a person’s home is their single biggest investment. If you subscribe to this idea, perhaps it’s time a dose of reality.

This mentality has been pounded into our heads by insurance companies, rehabbers and realtors trying to sell the “big package” when it comes to our homes. We all start to believe it. Then we get the calls from mortgage brokers telling us how much money they can us each month on mortgage payments if we refinance. They’ll also dangle the carrot of pulling cash out of the building during the refinancing too. “Why not enjoy the fruits of your labor while you are still young enough to truly enjoy it?” That sounds good too.

The 90’s and 2000’s were, and continue to be, ripe with this overbuying and refi-to-vacation craze. This kind of thinking has become part of American society. It can even be cited as the main reason for the current recession and why we are seeing so many foreclosures. Everyone has swallowed this type of thinking, hook line and sinker. It’s time to wake up to reality. Consider the costs involved of owning a house:

  • Maintenance and Improvements – No matter how nice the property, maintenance is always a must. Whether its something as simple as landscaping and paint or as expensive as a new roof or deck, these costs add up over time. And the bigger and nicer the house, the worse it gets. Smaller, cheaper houses might  need more repairs more often, but when they occur they generally cost less. The overly large and fancy houses favored in recent years are major expenses waiting to happen.
  • Insurance and Property Taxes – Owning a home also requires you to have insurance on the property as well as keep up with property taxes. Like maintenance, these expenses will continue indefinitely and will rise over time. Some areas in St. Louis have seen massive increases in property taxes over the past few years.
  • Interest – Assuming you get a loan for your property, you’ll be paying a hefty amount of interest on that loan for a long time. In fact, if you follow the typical trend of securing a traditionally amortized 30-year loan, a majority of your mortgage payment will be applied to paying of interest for the first 15 years or so of repayment. It isn’t until the second half of the loan repayment period that you really start to make good progress on paying down your loan balance. Since you will likely move or refinance your loan before you reach this period of more rapid pay-down, you will likely lock yourself into a cycle high interest, low principal mortgage payments.

But there is always appreciation to offset that right? Wrong. In the St. Louis area, appreciation rates are modest when compared to many other parts of the country. These rates range somewhere between 4.5% and 5%.  Not a horrible return in a vacuum, but consider the costs above.  Inflation can’t be ignored either. Averaging somewhere around 3.5% annually in the United States, money is worth that much less with each pass year. Using admittedly rough math, that only allows for 1% to 1.5% in actual housing appreciation each year. Start deducting the costs of all those interest payments, taxes, insurance and maintenance and things look less rosie. You’ll always have some principal pay-down to help out, but for most people that isn’t much. Other areas of the country have seen more appreciation, but as the current recession and rapid housing depreciation demonstrates, they have their own problems.

Start tallying the operating costs above and the “your home is your biggest investment” mentality starts to fall apart. Factor in the realities of appreciation and inflation and it blows up entirely. Rather than looking at a home as an investment, it is probably better to look at it as a sort of savings account. A wealth repository rather a than wealth generator. Its possible to get lucky and make a killing just by owning a home during the perfect time, but in reality it’s just a big piggy bank. Like any piggy bank, its only as full as you make it. Or leave it.

This article series is continued in Part 2: Responsiblity managing your home and Part 3: Investing your savings

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