We’ve all heard the lecture from friends and family who insist that buying a home was the “best investment” they ever made. Some of the most common claims are that it saves you money in the short-term and makes money long-term. But how valid are our perceptions of homeownership? Is buying a home a good investment in your future?
Is Buying a Home a Good Financial Investment?
The answer is complicated. For one thing, a home is not literally an investment in the financial sense of the word. Here’s why: an investment is an asset you acquire with the goal of generating future income. Stocks and bonds fit that description quite well; however, the money you put into a home rarely ever turns a profit.
While the housing market generally isn’t as volatile as other markets, individual home ownership does come with its own set of risks. The value of a home fluctuates quite heavily depending on several environmental factors such as location, liquidity, and area wage growth. We also know, based on the 2008 financial crisis, housing prices don’t always go up—so tying your financial security in your home can spell disaster.
Home equity is a homeowner’s interest in a home, which can increase over time if property values increase or the owner pays off their mortgage. It’s calculated by subtracting the amount owed on the home (i.e. mortgages and loans) from the home’s value. Forbes believes home equity is “unsafe, illiquid and its rate of return is always zero.” This is true for a variety of reasons such as housing inflation and banks restricting how much equity you can take. According to Robert Shiller, who won a Nobel prize in economic science, home prices have only risen .3% from 1890-2014. So while you may love your home, the chances that it will make you money in the long run are pretty slim.
Though investing in your home is a tricky business, it can still absolutely be a worthwhile and sound financial decision. After all, 64.2% of Americans are homeowners and real estate agencies are flourishing. Many young men and women choose to buy homes as they desire a stable place and good community to raise their families in. And depending on when you buy and where, buying a home can be cheaper than the alternative of renting a home or apartment.
With all that in mind, do your research and don’t feel pressured into buying a home. Understand the limits of home investments so you can make the best financial decision for your future.