Is a house a good investment? For years, the answer was an unequivocal yes, that buying a home was not only one of the very best investments you could make, it was practically an essential one for securing your financial future.
Then the housing market imploded. Soon after, a lot of Very Serious People came forward, clucking their tongues and saying it was all a mistake, that buying a home was actually a very bad investment. Many even said you'd be better off renting all your life, while others simply cautioned against becoming a homeowner until you could afford a substantial down payment.
Millennials appeared to be heeding the new advice and choosing to stay renters instead. But more recently, they've been entering the housing market in force, becoming the largest single bloc of homebuyers of any age group. It seems their hesitation was more a question of finances than a change in homeowning philosophy. In fact, surveys show that Millennials are more likely to regard a home as a good investment than their parents are.
So which is it?
An asset, not an investment
To be sure, part of the confusion is due to the different things people mean when they talk about an "investment." One of those meanings, and the one traditionally understood when talking about residential real estate, is to purchase an asset that will hold and provide value over an extended period of time.
Another meaning of "investment" though, is something that will earn money for you, often by increasing in value over the long time. Something that will turn a profit. That's how a lot of people began to view home ownership during the housing bubble and it contributed to a lot of the frenzy of those years.
Of course, once the bubble collapsed, it showed the flaws in regarding a home as that type of investment. Because a lot of people lost a lot of money.
But when you read experts saying that a home is a bad investment, they're usually talking about an investment in the second sense - as a means to make money. In other words, don't buy a home thinking you're going to make money off it, unless you're going to seriously get into the business of fixing up and flipping properties.
Rather than that type of investment, think of a home as an asset. A thing that has value, will hold value and return value over time. Something that will help build your net worth while saving you money in the long run.
Is renting better?
To be sure, there are people who say that buying a home is a bad financial move, period. They say you're far better off to rent a comparable property for less money and sock away the difference in a retirement account or index fund.
The renting-is-better crowd base their argument on one key factor: that long-term appreciation in home values, often cited as a reason for buying a home, really isn't much different from the rate of inflation. And that's true. The Case-Shiller Index, which tracks repeat sales of the same homes, found that existing home values increased an average of 3.4 percent a year from 1987 to 2009, compared to an annual rate of inflation of 2.9 percent for the same period.
Rents increase over time
However, here's what they ignore: that while home values increase at roughly the rate of inflation, so do rents. So if you buy a home with a fixed-rate mortgage, you've locked in your monthly housing costs for the next 30 years (excluding taxes, utilities and insurance), while if you rent, your rents will continue to rise every year.
Let's say you can rent a home for $1,200 a month, but buy a comparable one for $1,600, utilities, taxes and insurance included. At a 2.9 percent rate of inflation, your rent would equal the mortgage in just 10 years - and the gap would be shrinking that whole time, eating into what you could set aside to invest. And after 10 years, you'd be losing ground.
Even in a relatively low-rent area, where the monthly cost to buy is half again as much as rent, you'd reach the draw-even point in 14 years.
And that's ignoring the fact that in much of the United States right now, the monthly cost to rent is close to, and frequently even less than, the cost of renting a comparable property. That's in absolute, dollar-for-dollar terms - rent vs. mortgage, taxes and insurance - excluding the equity you're building over time.
In fact, some analyses put the long-term (30-year) cost of buying a home at roughly 40 percent cheaper than renting on average throughout the United States. Even in San Francisco, where home prices are relatively high compared to rents, buying turns about to be about 20 percent cheaper over the long run.
Accounting for maintenance, mortgage rates
Of course, you also have to take into account the cost of home maintenance, which will be an ongoing expense. The rule of thumb is to budget about 1 percent of your home's value per year, so for a $240,000 home that works out to about $2,400 annually, or $200 a month. Of course, this isn't a steady expense - rare expenditures such as a new roof or siding replacement drive up the average - but they still need to be accounted for.
It should be noted that one of the reasons home purchasing is so very competitive, if not cheaper, than renting at the moment is because mortgage interest rates remain extremely low by historic standards, with 30-year fixed rates currently below 4 percent.
By comparison, each full percentage point rise in mortgage rates would mean approximately $1,450 a year in additional interest costs on a $200,000 mortgage. That's like tacking another $43,000 onto the home price, over 30 years. Given that rates were in the 5-6 percent range only a decade ago, and considerably higher not long before that, that represents a bargain that may not be around much longer.