Buying A House Isn’t An Investment, Still Better Than Renting

A story in the Washington Post is making the rounds in a big way the last few days, pointing out that buying a new home isn’t the investment most americans think it is.

The article implies that since housing prices don’t appreciate as quickly as people tend to think they do, the return on investment isn’t as immediate or as high as people expect it to be and people are saddling themselves with debt but not gaining the benefits of investment.  That sounds legit, and many people are exhibiting their confirmation biases by parroting it without thinking about it, but there is way more to this than “investment income.”

First, let’s define investment.  The Washington Post seems to want to define it as an expense that results in monetary gain down the road.  While buying a house isn’t as advantageous as buying a high-rate CD or playing in the stock market, it’s hard to argue that renting over an extended period of time is a smarter choice than owning your own home.  The article starts by explaining that people tend to view houses compared to houses that their parents bought, so when they hear “Wow, that house cost $90,000 when you bought it and is worth $400,000 now!” they buy a house thinking that things will always appreciate that much, which clearly they don’t.

But that doesn’t mean buying a house isn’t a good “investment” as long as you’re not doing it to make money.

In 2011, Wifey and I decided that we were going to stop throwing our money into the zero-return world of renting, and we decided it for numerous reasons, but not the least of which was the fact that within a few years we would own our own home and that ownership would actually save us some money every month.

Mortgage_vs_Renting

At the intersection point on the chart, that’s where our mortgage would cost what our rent would cost had we stayed in our apartment.  This chart makes some assumptions just for the purposes of making a conclusion, one of which is that rent increases were steady at $65 per month per year (some years they would be $75, some $100, some $50), but the numbers demonstrate the clear difference.  By the time paying the mortgage is done, the rent (if we stayed in that same apartment, which by New York City standards was a bargain) would be approximately $1300 a month higher.

Over the course of the mortgage, we would save $106,000.

Consider that we borrowed $300,000 to buy this house and that the $106,000 savings is only the difference between rent and our mortgage payment.  This assumes no appreciation in the house’s value, no raise in mortgage rates making our money actually cheaper, and zero inflation, meaning our dollar is paying off a house worth more than the dollar of the day.

In fact, one commenter agrees with me and summarizes it nicely:

it is odd that there’s no mention of the leverage associated with financing, where the appreciation applies to the entire value of the home, including financing, while the original cash down is only a fraction of that. It only works if prices rise, but even if they only rise a little, the leveraging effect multiplies the return on the down payment. A comparison of house price increases to the ROI of the stock market is flawed as a result – unless you want to invest on margin, and you can’t do that on an 80/20 basis like you can in real estate.

Are you starting to see how flawed the argument that “buying isn’t as great as people think it is” is yet?

I’ll readily admit that buying a house isn’t for everyone, but the one thing the article fails to take into consideration is that not buying a house is not the same as not needing to pay for housing.  A person has to live somewhere, so if they’re not “investing” in their own home, they’re simply tossing into a landlord’s pocket and no matter how many years they have of doing so under their belt, they walk away having to start from scratch.

The bottom line is this: buying a house may not be for you or it may be perfect for you, but the argument that renting is a better option is short-term thinking clouded by faulty understandings of what an investment actually is.
photo credit: coffeego via photopin cc

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