Home Sweet Home

Smart Money examined the question of the value of home ownership as an investment.  The article challenges the conventional wisdom that home ownership is always and everywhere a good economically and socially.  There is little evidence presented, and I would daresay that there is little agreement among social scientists, about the societal value of a populace of home owners versus renters.  On the other hand, the article does not shy from drawing the conclusion that home ownership is weak mas an investment. The story arrives at this judgement based on flat home prices between 2000 and 2010.  In fact,  the return on home ownership is more complex than just whether or not the property has appreciated.

Home ownership has three elements to its return.  First is the appreciation of the asset.  While prices were flat over the first decade of the current century, the article notes that "the rate of appreciation in housing seems likely to return to its long-term historical average, which is only slightly higher than the rate of inflation."  While this growth of capital pales in comparison to the long term return to common stock, for instance, it is competitive with returns to Treasury securities.

The next element having an impact on returns are the costs of ownership.  These include taxes and insurance, as well as the regular maintenance and repairs to the property.  These expenses can easily approach or exceed the expected appreciation on the property.

The final element of return is rent.  Like food and clothing, housing is a human necessity.  By owning one's own housing, the homeowner avoids paying rent.  The rent avoided by owning the property varied by property size, type and location, but is often in the 8% - 10% range.  And rent is highly sensitive to inflation.

Now notice that there is no consideration given to mortgage interest and its tax deduction.  This is because borrowing money to purchase the home is a financing decision.  It will have no effect on the return to the asset.  It does have the effect of increasing the risk of owning the home, and thus amplifying the return, either positive or negative.

At the end of the day, the primary purpose of home ownership is avoiding the recurrent cost (rent) of housing.  From an economic standpoint, ownership tends to be a wash as an investment.  However, ownership provides non-economic benefits that renting does not: control over the timing, extent and details of repairs and improvements, sole access to the premises, a sense of accomplishment that accompanies ownership.  In short, I have resisted analyzing the purchase of a home as an investment favoring instead an analysis concentrating on the buy versus rent decision in the context of the individual's budget.