I’m amazed at some of the things I hear on financial TV shows now. I read a CNN article recently that estimated that from 1974 until 2006 (I don’t know why they picked these dates, but I suspect it made the answer they wanted look better) The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. The S&P, however, delivered a crushing 13.4%.
Makes you want to sell your home, rent a home, and invest all your cash into the stock market right? But maybe you should consider the rest of the facts.
1. You have to live somewhere, so even if you were not paying a mortgage, you would be paying rent, one that probably increases every year
2. Most homes are leveraged with most down payments at 20% or less, making the real return on investment much higher
a good example would be if you bought a $300,000 with a 20% down payment would require $60,000. We all know a you will have other expenses, but lets keep it simple.
If the $300,000 house appreciates at 8.6% per year as the article suggests, your home would be worth $325,800 after one year, an increase on your $60,000 of 43.8%.
It crushes the 13.4% return of the S&P if you look at it in a common sense way.
If you pay cash for the home, your ROI would change dramatically. But then you would have to factor in the savings of having no house payment or rent payment as well as your 8.6% yearly appreciation, the result would be similar to a stock or fund paying a 7 or 8% dividend. Once again, crushing the S&P500.
It’s a shame that a lot of financial advice columns are slanted to make housing look very risky, but you really can’t compare these two without considering the fact that you live in the house, and to the best of my knowledge it’s the only personal use item that’s an appreciating asset.
In my experience, both of those average returns seem high, but like I said, it’s because they wanted to use the highest possible periods to prove a point. I researched a recent sale on a home that had been sold in 1983, and again in 2013, exactly 30 years of data. The home was purchased for $112,000 and sold for $420,000. The annualized gain on the home was 9.6% that the article was using. But because the home owner only had to put 20% down or less, making his $22,000 investment increase to $308,000 in equity, an annual compounded rate of 43%. I’ll not really go into the details of how much money he saved by having a house payment of $540 dollars a month for the life of the loan instead of rent that goes up at the rate of the market, and at the time of selling the home, would have been in the $2500 a month range. Let’s just say more than $100,000. They would have to make repairs and maintain the property during that period of time, but over the 30 year period of time, it would have still been very minimal compared to the cost of renting.
Let’s recap –
- the return on investment on the S&P over the most favorable 30 year period of time according to CNN was 13.4%
- during that same period of time houses appreciated 8.6%. But because most people mortgage the home with a 5% down payment, the true ROI would be
- you can’t live for free, your mortgage payment is probably would your first year of rent would be, the only thing you really have invested is your down payment. It could be as low as 5% or 20%, that’s your investment. Using the 5% number, your annual return on investment would be 179%, at 20% down it would be 43%.
I don’t think it’s even close.
