Is Your House an Investment?

Conventional wisdom says that your home is the biggest and best investment that you will make in your lifetime. The collapse of real estate values between 2007 and 2012 has called this belief into contention. Recent history demonstrates that your home might not be a very good investment.

Yes a house is an investment in that you put money into it and you hope to earn a profit by selling it someday. The problem is that a house is not like other investments it comes with added costs that can quickly eat up any investment gains. It also comes with some risks that many people fail to understand.

Home Investment Fallacies 
People who regard a home as a great investment often buy into three dangerous fallacies that must be dispelled. These fallacies greatly exaggerate the potential value of a home and ignore or underestimate the inherent costs and risks associated with it.

The first fallacy is that real estate always goes up in value. This as many people have found is nonsense real estate is subject to booms and busts like any other market. Average home values in the United States actually fell by around 15% between 2005 and 2008 according to Zillow. Automatic increases in property value are not guaranteed. Between 2007 and 2012 many homeowners actually found themselves underwater or in possession of a home which was worth less than the amount it was mortgaged for.

The second fallacy is that homes are somehow exempt from inflation. This is definitely not true, even if the mortgage payments remain the same or a person owns a home outright inflation can eat up your income. The added expenses related to a house such as utilities, maintenance, insurance, taxes and repairs are subject to inflation. When prices go up the plumber, the painter, the insurance company and the electric company will raise their rates accordingly.

The third fallacy is that homes are exempt from taxes because of the mortgage tax deduction. Yes you can deduct mortgage payments from your income taxes. The problem is that most homes are subject to property taxes which often bear no relation to the home’s real value. The property valuations used by local governments are notoriously inaccurate. Some of them are deliberately skewed to artificially raise property values to generate more revenue for local government. Homes can also be subject to sales taxes, capital gains tax, impact fees, homeowners’ association fees and various fees imposed by local governments. The truth is that property taxes and mandatory fees homeowners face often exceed the value of the mortgage tax deduction.

Your Home as a Retirement Investment 
The fallacies listed above certainly bring the use of real estate as a means of financing retirement into question. Part of the reason why a home may not be a good retirement investment is the mortgage. If you find yourself unable to pay the mortgage you will lose everything you punt into the mortgage and the home.

Therefore it is a good idea to rely on other instruments for financing retirement. Yes you can lose money on stocks, ETFs, or mutual funds but the only money you spend on them is the initial investment. Unlike a house a mutual fund or a share of stock will not have to be painted every few years. Nor will a share of stock or an annuity ever need a new water heater or a new roof. You can also invest in these items through tax-deferred vehicles such as IRAs and write them off of your taxes.

If you are worried about security there are guaranteed investments including treasury bonds and annuities. There are even indexed and variable annuities that can be partially invested in the stock market to combat inflation. In today’s world paying attention to conventional wisdom and using your house as an investment can be a fast track to ending up broke and retired.

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