Why a house is a terrible investment (2013)

They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life.

The best future investment that could have been made here is living within the reality of the numbers.

Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs:

    - interest on your mortgage
    - mortgage insurance (if you have >80% LTV)
    - closing costs on your loan (2-5% when you buy)
    - property taxes
    - homeowners insurance
    - yard care / landscaping
    - HOA fees
    - home maintenance (estimated: 1%/year)
    - realtor fees (6% when you sell!)
    - excise tax (~1% when you sell, in my locale)

I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy.

Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.

BUYING REAL ESTATE

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Take the average price of a home in the USA, according to a google's top result, approximately 200,000.

Take the average APR at the moment, 4.5%.

That results in a $800 payment per month for 30 years if you put 20% downpayment of 40,000. (source https://www.dollartimes.com/loans/mortgage-rate.php?length=3...)

Depending on the area, you'll most likely be able to rent a similar home for the same or lower amount.

BUYING STOCKS

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Take the same 40,000 downpayment and invest them in a low cost broad market index fund such as Vanguard, SPDR, etc.

Assuming an average long term return of around 9% for the stocks, after 30 years this will result in around $600,000.

(source https://www.investor.gov/additional-resources/free-financial...)

WHERE IT GETS INTERESTING

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Let's look at what happens after only 5 more years. Your investment has now grown to over %933,000! If you wait 5 more years (40 years total), the sum is now $1,400,000+ !

Why? Because investments in stocks are compounded! I believe one of the reasons why people think a house is an OK investment is because they don't realize the biggest flaw of one house - it does not really compound the way liquid stocks or ETFs do. In the short run it's hard to see the difference but given a long horizon the differences become enormous.

There's reasons to own a home such a sentimental value, ability to modify it just you like it, etc. But people who believe it has been or is a great investment in the long term are deluding themselves. Look at it as something that's nice to have, or luxury if you will.

PARTING THOUGHTS

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You can always come with an example where real estate was a great investment. You can make that argument both ways. If you bought real estate in 2009, you made great returns but if you do the above calculation for the average broad market ETF chances are the returns are even better!

In the long term, history is on the side of dynamic stocks/companies and not real estate. I don't have a crystal ball and can't promise you that choosing one or the other will be better next month/year/decade etc(aka past results do not guarantee future returns). After all, this is all facts of the past :).

Whoa, you have to go bankrupt to stop paying a mortgage in Canada? In the US, these are (in my experience) secured, non-recourse loans. That means that the bank's final option is to take the house, but if they do that, you owe them nothing else.