Today I’d like to discuss Buying A Home: A Bad Investment, But (Usually) A Great Financial Decision.
So, Purchasing a home is a milestone for any family. It enables folks to plant roots in a community and serves as a base for a lifetime of memories. A home is also the largest asset for many families. Since it is such a personal asset, people tend to get emotionally charged when discussing its investment merits. They state tax benefits, unsubstantiated return assumptions, and conveniently forget to factor in the massive upkeep costs associated with homeownership.
In a video clip I recently saw online, a realtor was interviewing a man who purchased a home 50 years ago in Palo Alto, perhaps the hottest real estate market in the country, for $40,000. She told him he can sell his modest home for nearly $3 million today. The owner is amazed, the comments on the video are in disbelief, and the realtor uses this interview to support how homeownership is a great investment. The truth is, Palo Alto is an outlier, with most parts of the country not experiencing the same explosive growth in their housing market. More importantly, if you calculate the return for this homeowner, it would be approximately 9% a year. This is a great return, though it slightly trails the performance of the broad stock market. Additionally, once you factor in the annual costs of owning a home, like property taxes and upkeep expenses, his effective return is actually a few percentage points lower. This seems like a lot of excitement for a net return in the mid-single digits.
All in all, folks tend to think of their house as a better investment than it actually is. My personal view on homeownership has evolved over time. Instead of focusing on the subpar returns that most homes will generate, I have come to appreciate why a house may be an excellent financial decision for many families.
In the upcoming videos I will share my thoughts that may be helpful perspective for those who are in the market to purchase a home today.
You can WATCH the full video here.
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