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Financial Fallacies - Your Home is a Good Investment

Today kicks off a three part series on common financial fallacies. The first one may partially be inspired by an exasperated comment I made to my wife this week after another future project was fast-forwarded to a present urgency. I believe my exact phrase was “I’m so sick of being a homeowner.” 

Lack of patience aside, it brought to light something I’ve hinted about before: homes aren’t an investment. Or, if they are - they’re a pretty lousy one. 

Don’t get me wrong, as I’m not advocating for NOT owning a home. There are tons of benefits of owning a home. 

However, as an investment? Not so much. Calculating existing home sales is somewhat of a challenge, but if we look at the most recent data from the Case-Shiller US National Home Price Index (January 1987 - July 2020) and solve for the rate of return, it comes out to an annualized 3.85%. For reference, the average US inflation over that time period was 2.59%. 

Viewing a home as a great investment also often ignores many expenses that people don’t think about when they say “Oh, well we bought it for $___ and we sold it for $_____.” A partial list of those include interest paid on mortgages, property taxes, transfer/realtor fees, and maintenance and improvements. Not to mention opportunity cost of what else you could have used those funds for. 

Again - there are a ton of very good reasons for owning a home, and some of those expenses are offset by tax deductions on mortgage interest payments. So I’m not arguing against home ownership (despite my recent complaints to my wife). 

But I am stating that our homes themselves aren’t that great of an investment. 

And yes - there are the exceptions, as there are in most things of finance. But as a whole, our homes are best viewed as a relatively stable roof over our heads, which may increase in value, and carry with them ever-present expenses and liabilities.

Interesting Resources

Quote
Mark Buchanan
"Cease from what is necessary. Embrace that which gives life. These two things, taken together, make up Sabbath's golden rule."

Charting 20 Years of Home Price Changes in Every US City
A few mins read | VisualCapitalist
After I composed the above content for this week's email, I checked my inbox to see this piece was delivered to my inbox about the time I sat down to write. Perfect timing. Really fascinating interactive chart that looks at state and city specific change in home prices across the country. But remember our lesson from the other week about deceiving with data? Be careful here - a "106% increase in just two decades" sounds impressive, but that's an annualized rate of return of just 3.67% (hmm, that number sounds familiar). 
Huge thanks to everyone who replied last week on my request to battle Google's promotions/spam filters. Tons of replies, and unfortunately - no discernible pattern. One of you even let me know that on your phone Gmail dropped Fident Friday into your Primary inbox, and on your computer it went to Promotions. Microsoft and other email providers seem to view this email a bit more friendly, and as I suspected - Google is the primary culprit. I'll experiment around with a few things on my end, but will admit I probably won't ever be able to fully guarantee accurate inbox delivery.

Take an extra moment this weekend to hug and cherish a loved one in your life, and smile at the many blessings around us - even in such a crazy year. 


Gratefully,
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