Is a House Really a Good “Investment”?

I’ve had this post queued up for three months debating whether to post it or not because I know it will ruffle a lot of feathers.  Then I read this great article confirming many of my thoughts and I figured I should just throw this one out there for everyone to kick around….  

Recent discussion here regarding real, real returns (returns net of inflation, taxes and fees) and the flawed BLS calculation on Owner’s Equivalent Rent sparked a good discussion about the benefits of buying a home.  And it got me thinking about how most people seem to think owning a house is a great “investment”.  Now, I have an obvious issue with this misuse of the term “investment” (especially as it pertains to the way portfolio managers and retail “investors” use it), but it also got me thinking about housing price returns on a larger scale.  That is, on a real, real return basic.  Thornburg Investments says houses return a barely positive return on a real, real return basis, but as they note, all of the fees are not actually included in this calculation.  So let’s take a closer look here at this asset class that so many seem to believe is a good “investment”.

Before we start, it might help to think of a house as two distinctly different pieces.  First, there is the land that you own.  Second, there is the actual house itself.  The land is what I would call an “investment” since it’s highly probable that the land itself will appreciate in value over time.  The house itself, however, is a depreciating asset that is guaranteed to fall apart just like your car will.  If it has any intangible “investment” components those are subjective and not necessarily financial (though I guess they could be, for instance, if you work from home).

Anyhow, if you’re familiar with Robert Shiller’s work you have likely seen figure 1 below showing real house prices since 1890.  Since 1890, housing in the USA has averaged a 3.2% annualized return.  It’s been slightly better since 1960 at 4.2%, a bit better than that since 1970 (4.8%) and more in-line with the historical average since 1980 (3.8%).  That might not sound so bad were it not for inflation.  Inflation has historically averaged about 3.2% as well.  Hence the chart below which shows housing prices close to the 100 level throughout their history.  Said differently, real estate doesn’t generate a return at all when you back out inflation.

But anyone who works in the financial services business knows that there are always costs attached to purchasing various financial assets.  Most of these fees are recurring of some sort and can range from the reasonable (like ETF’s or discount brokerage fees) to the absurd (most hedge fund fees or annuities).   Real estate is not immune to the fees and the costs arise in ways that are even better disguised than a bulge bracket brokerage statement.

Like all financial asset purchases you are guaranteed to start your purchase in the red by the amount of the fees involved in purchasing the asset.  Homes are an unusual financial asset in that they’re extraordinarily expensive from an up-front cost perspective. You have realtor commissions, closing costs, inspection, appraisal, insurance and a whole slew of other potential costs such as moving or maintenance.  This is before you’ve even stepped foot into your “investment” and before you’ve started paying the real fees (like your mortgage, which will cost you almost 75% of the cost of the home over the life of a 30 year mortgage AND the maintenance)!

For simplicity, let’s take an example of a home worth $200,000 and assume some relatively modest up-front costs.   Let’s also assume, like most Americans, that we have a fixed rate 30 year mortgage at 5.5%.  Let’s also assume some fairly conservative estimates for commissions (which I split because one could argue that both the buyer and seller pay the fee), closing costs and inspection.  Nothing too complex (I know, I am oversimplifying!).  But the total comes out to about 5.25% of the cost of the house.  That’s similar to buying an A-share mutual fund, which is something that you only do if you’re suffering from sort of degenerative brain defect.

But we’re really just getting started with the fees involved in this financial asset.  Over the life of a home you’ll have to pay taxes, mortgage payments, property insurance, utilities, water, disposal and routine maintenance.  These are all fixed costs and whether you rent or buy you’ll have to pay some of these fees no matter what.  So let’s throw out utilities, water and disposal with the assumption that your rental option has those costs embedded.  But when you own a home you’re still paying the mortgage, taxes, property insurance and you’ll have to maintain the property yourself.

According to the 2009 American Housing Survey these costs come out to about 7-8% of the value of the home per year.  Here’s the breakdown:

Now, that mortgage “cost” includes principal payments so let’s just take the average national mortgage rate according to the AHS and assume that the 30 year mortgage will cost you roughly $165,000 over the life of the mortgage (this is JUST the interest paid).  Using a basic amortization schedule it’s pretty safe to assume a monthly interest payment of $800 or $9,600 per year.   That brings our annual costs down to about 6.5%.  You could also back out part of the taxes due to the mortgage deduction so let’s be generous and assume that our home costs us about $10,000 per year or roughly 5% of the mortgage.  Even in the best periods where real estate returns 4.8%, the total return is still negative!  That’s one expensive financial asset and it brings our real, real return down to -5% per year assuming we break-even after inflation.

The Bottom Line

Don’t worry.  This post isn’t intended to wreck the “american dream”.  None of this analysis means that buying a house is a bad idea.  You have to live somewhere and this analysis does not compare the specifics of renting versus the specifics of buying a house outright, buying a house with a mortgage or using the property as an income source.  The analysis is simply intended to put the total costs and real, real returns in the right perspective for those of us who buy a house with a mortgage and live in that home (as most people do).  In my personal opinion, I view buying a home as a less expensive way to live than the option of renting (but I guess you could make both arguments depending on where you live).  Plus, there are numerous intangibles involved in owning your own home that make it a wise purchase.  But we should stop thinking about housing or talking about it like it’s an amazing “investment”.  Whether you rent or buy you are experiencing an expense.  The real costs of that expense will depend on your specific situation.  But in both real returns and real, real returns (including taxes and fees) the returns are unlikely to be anything to write home about.  And certainly not what I would refer to as a good financial “investment”.

(Figure 1 – Real house prices)


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Frederick

    Real estate is an investment. For the legion of realtors who sell it and the banks who rely on mortgages to keep their businesses afloat.

  • SS

    Excellent. One of your best posts.

  • Bernie

    There is an advantage to owning a home that you didn’t discus. A house provides an opportunity for you to improve its value, the “sweat equity”. A lot of people have limited ability to turn their time into money for investment either because you’re a salaried employee or your employer limits your hours. You can put your extra time and effort into improving the value of your housing investment.

    That said, I’d like to challenge your assumption that it’s “highly probable that the land itself will appreciate in value over time.” I think the demographic trends of an aging population will have a negative impact on land prices. More older people will be downsizing the amount of land they need to care for and will be moving into apartments closer to population centers where medical care is close by, or moving in with their children.

  • CJ

    I think with land prices, Cullen is assuming that central banks continue to target and achieve positive inflation. If inflation remains the norm, then land prices should track this as they have done for decades/centuries – see Shillers chart above.

    Of course, the question is whether it is possible to target positive inflation for eternity – I have my doubts, given factors such as demographic headwinds as you mention, but also I’m concerned by the fact that this requires ever increasing credit expansion (lending creating money), or alternatively inflation via cost pressures. I’d bet on the latter over the former in the long run, but in such a case inflation is no longer such an attractive target is it? I think I’m going off on a tangent here…

  • Anonymous

    You did not include rents in your analysis. I don’t think too many people believe that buying a house to let it stand empty is a good investment. They are either going to live in it and save paying rent somewhere else or they are going to rent it out and have an income stream. Just like any other asset a house can generate cash flow.

  • S.E.

    Great post. Thank you for the clear analysis.

  • Lincoln

    There is another major factor that was ignored in this article: other people’s money. Though interest is a cost to owning most real estate, real estate is typically purchased with mostly other peoples’ money.

    In addition, I would suggest that the average return for peoples’ investments after fees, taxes, and so forth are probably less than 3.2%. I know that many invest in the markets through their 401ks, but there are also many other investments where people lose money or don’t invest (either scared or have no money).

    This is an interesting discussion, but ultimately as you pointed out, investing in housing is a relative investment that is always relative to the alternative–renting.

  • Shorehaven

    Though you mentioned depreciation, you didn’t show it on your costs chart. Some people say the average life of a house is between 80 and 100 years. Some houses are razed within a few decades and others may stand for centuries.

    The building stock history in lower Manhattan is a good example that houses or buildings generally don’t remain around for very long. The typical piece of land south of Houston Street probably has seen 4 to 5 structures occupying its space. Houses and buildings built in the late 1600’s and 1700’s were replaced in the early 1800’s only to be replaced again in the late 1800’s. In the next 20 to 30 years most of these buildings were replaced with steel frame masonry buildings. And in the past 30 to 40 years many of these have been replaced by glass towers.

    As any successful developer will tell you, the profit is in the land.

  • jmf1928

    This doesn’t really make sense, as if you weren’t living in the house, you’d be paying rent. If you’re going to analyze it as an investment, you need to look at what the rental income would be net of the tax benefit. If you could buy a house at a 10% cap rate, it’s probably better from a cash flow perspective than renting. At 4-5% in NYC, it’s less compelling unless you know you’ll be there 5+ years, but the high tax rates do still make it interesting.

  • jmf1928

    What happened to the forum btw?

  • JC

    I think the moral of the story is next time you buy a house, get you basic needs and put the extra cash into better investment options such as stocks that appreciate at a much higher rate after all costs are considered. Studies show commute time to work is a very important factor to happiness. So get a basic house relatively close to work. Kick extra cash flow into stocks and all is well.

    And demographics are favorable to land prices. Old timers don’t leave their houses until they are well into their 70’s, not when they retire. This is a decade off. The population entering age 30, prime first time buyer age, is increasing and will put upward pressure on demand.

  • jswede

    I’d distinguish btwn primary residence and investment properties — unless you’re planning to live on the street after realizing the return on your “investment” in the house you live in, you’ve just kept up with house prices, and are – by definition – all else equal, flat.

  • Lucas

    If it is any guideline, the IRS specifies depreciation rates for building at 27.5 years for residential property, 39 years for business property, and 40 years under ADS.

  • aogut

    i like both stocks and real estate, and always struggle to decide one over the other; and i m happy to see this post. but i m not sure if i read your argument correctly.

    1) case-shiller is inflation adjusted if i remember correctly.
    2) assuming 100% financed and interest-only payment (just to make it simple)
    mortgage interest: 5% (without considering tax)
    inflation: 2%
    inflation adjust mortgage interest: 3%
    tax: 1% (using your number)
    maintenance + misc: 0.5%
    total cost: 3+1+.5=4.5%
    rent: let’s say 7%
    net CF/year: 2.5%

    3) assuming real annual appreciation 2%. total gain/year 4.5%

  • jaymaster

    Good points! I agree almost completely.

    The dynamics can change in an inflationary environment, even a relatively mild one. This is assuming you pay for the place with a fixed rate mortgage.

    If the home value tracks inflation, which history shows it usually will, you benefit from the fact that you’re paying off the loan with inflated dollars. And the 5:1 (or whatever) leverage helps here too. It’s one strong argument for using a 30 year loan and NOT paying it off early.

    Of course, if deflation appears, you’re screwed! :(

    On the tax deduction side, a lot of people forget that this benefit is hugely front-loaded. Because of typical amortization schedules, the earliest payments are mostly interest, the later ones principle.

    I’ve read suggestions that the optimal financial strategy is to take out a 30 year, 20% down loan, and hold it for at least 7-8 years (unless rates drop significantly before then, in which case you would refinance). After 7-8 years, you’ve captured a large chunk of the tax benefits. At that point, it might make sense to re-finance for another 30 years.

    It’s basically a “heads I win, tails the bank loses” inflation hedge.

    Oh, and this also assume you’re going to be living in the place for a looonnnggg time. Because a home can certainly become a boat anchor.

  • bart

    Using just a CPI adjustment assumes that CPI is a correct inflation adjustment, which even Cullen’s work shows to be substantially understated.

  • exertia

    Since the Buy vs. Rent analysis is a highly subjective one, here is one of the most elegent Buy vs Rent calculators to do the analysis for your situation:

  • Johnny Evers

    The analysis overlooks the fact that by owning, you are not paying rent.
    So in the example above, if you were not paying $12,400 a year in mortgage costs on your 200k house, you would be paying roughly the same amount in rent.
    So really you are paying 2,100 for taxes, 775 for insurance and 400 for maintenance ($3,275 a year) for a 200k house that adds $6k in value every year. You are doubling your annual investment every year!
    Also, in 20 years, when your ‘rent’ (the mortgage cost) is still fixed at $12,400, your renting neigbor is paying twice that.
    And in 30 years, assuming you have either stayed in place or rolled your equity into your new home, you are living rent free while your renting neighbor’s costs are still growing every year.
    Retiring without a mortgage is a major key to a finacially secure retirement.

  • Cullen Roche

    No, the analysis specifically states that you “have to live somewhere” so owning a home is a better expense in general. Do you even read my posts or do you just automatically reject the concept and attempt to debunk it without having understood it?

    It gets very tiresome having to correct every single comment you write….Can you please try to read the posts in the future and make an honest effort to digest the material?

  • Johnny Evers

    Your words:
    ‘You have to live somewhere and this analysis does not compare the specifics of renting versus the specifics of buying a house outright, buying a house with a mortgage or using the property as an income source. ‘

    Your analysis leaves out the major benefit of owning a house. So what’s the point of analyzing an investment if you don’t consider the primary factor that makes it a good investment?
    Yes, if you’re buying a house and leaving it empty for 30 years while you pay rent somewhere else, sure, it’s a terrible investments.

  • Cullen Roche

    Most homeowners don’t buy their house so they can rent it to someone else. This analysis covers primary residence. I didn’t think I had to explain that to everyone since the article makes it pretty clear.

    Again, do you read the posts or are you just trying to be difficult for no reason?

  • jkh

    Why do you think OER is a flawed calculation, Cullen?

  • Johnny Evers

    If you’re living in the house, the mortgage is not part of the investment. The mortgage is the rent — btw, rent that never goes up.
    Your true investment outlay is cost of maintenance, taxes and homeowners insurance.
    So I’m investing four thousand a year for 30 years and wind up with free rent and a 400k asset to leave to my kids when I die.
    Pretty good investment.

  • Cullen Roche

    I don’t necessarily think OER is flawed, I just don’t know if it actually reflects the reality of most people. I think that housing is at least partly consumptions so it can be useful to include a component of housing in the CPI that reflects this.

  • Cullen Roche

    Well, you’re actually unlikely to make money on the property, but you obviously don’t want to try to understand the post so who cares. If you consider it an investment in that it improves your living standards relative to renting then great. But that’s not financial anslysis. That’s just Johnny feeling better about something he likes.

  • Johnny Evers

    Since you are conceding that owning vs. renting improves your living standard relative to renting, (and since improving your living stanards is the definition of a good investment), I’ll ignore the potshots.
    I’m interested in the facts of the argument, not whose feathers get ruffled.

  • jkh

    I don’t want to go into the weeds on this, because I’m not an expert on OER, and I basically agree with your view on housing as an investment – the long term real price graph is very important in that regard.

    But the basic reason for OER in my view is not because BLS treats it as an investment – it’s because it treats it as an asset.

    And there’s a subtle difference in those rationales.

    CPI tracks the price of consumer stuff that’s included in NIPA – newly produced consumer stuff that’s bought that costs money and that can affect the cost of living.

    With regard to housing:

    CPI doesn’t track new housing prices because new housing is an investment good in NIPA, and not a consumer good.

    But CPI also doesn’t track existing housing prices, which relates to something that is not even an investment good included in current NIPA.

    So it doesn’t track the price of housing because housing is an asset – whether its a newly produced investment good or not.

    So that’s consistent.

    With regard to the purchase of houses:

    The purchase of new housing by ‘consumers’ is basically an asset swap of cash and borrowed money for a newly produced investment good.

    And the purchase of existing housing is also an asset swap.

    So that’s consistent.

    With regard to housing purchases versus rent:

    Rent is clearly part of the flow of goods and services and income that are part of NIPA.

    Imputed rent basically simulates the production of those same goods and services and the payment of simulated rent from the homeowner to himself for same.

    It puts the NIPA measure of goods and services on a consistent footing when there is movement back and forth between households renting and owning.

    And the imputation covers all housing – regardless of whether or not a new house has just been produced as an investment good.

    So that’s consistent.

    And the inclusion of old or exiting housing is why the rationale is asset based rather than NIPA investment based, because imputed rent is included in NIPA regardless of whether it relates to a current NIPA investment good or not.

  • Geoff

    Hey, JKH, what’s with the lower case initials? Are you feeling down?

  • LVG

    Why is a car in the CPI? Couldn’t it be a form of investment in the same sense that a house is? It’s also an asset.

  • JKH

    it’s the heat


  • David

    Cullen – I think you forgot that after the life of the mortgage, you’re left with a, uh, house. And no more mortgage payments. So that after year 30, you are actually accruing value “for free” every single year. Of course, you did kind of mention rent in there at the end, but I would’ve liked to have seen a real return analysis that factors in the rent cost that is one’s opportunity cost. Overall though, I agree that the “house as investment” idea is kind of a joke…

  • JKH

    interesting point on cars

    don’t know

    this looks like an interesting article:

  • Cullen Roche

    True, but for most of us, we buy a house, spend our working lives paying it off and then retire into someone else’s house (called the hospital or the nursing home). :-)

  • JKH

    interesting – this one only mentions new cars, which would be consistent with what I wrote about housing – i.e. that the CPI is capturing the price inflation of good and services in NIPA; but I haven’t read the first article yet

  • Cullen Roche

    Yeah, the economists are always consistent. I guess I wonder whether we should think of a house as an investment or something that is actually being consumed? I don’t think there’s a black and white answer….Or maybe you have the answer?

  • LVG

    CPI includes used cars.

    See page 9:

    I think Cullen’s point is that a house is a lot like a car and that it’s a depreciating asset.

  • JKH

    no, I don’t have the answer

    just exploring something I thought I had an intuitive feel for, but I’m not an expert on CPI construction

    and not quite sure how the used car thing fits in consistently

  • JKH

    although imputed rent does cover both new housing and existing housing

    so I suppose covering both new cars and used cars is consistent

    just the methodology is different

    maybe because houses are treated as assets and cars are treated as consumer durables (I think)

    so that might work

    I once worked for a guy who kept reminding me of the quote:

    “A foolish consistency is the hobgoblin of small minds”

    I wonder why he did that.


  • JKH

    I think the fact that cars have amortization schedules might have something to do with the treatment

  • Geoff

    The food in my fridge is a depreciating asset.

  • roger ingalls


    While I’m inclined to agree with you, I just don’t independently come up with the same result. Of course, I used different assumptions . Now that I am done, I hear the peanut gallery shouting “Get your own blog”, but there’s just no way to do it shorter, sorry, and there’s no other financial blogger (or followers/commenters) that I respect more than that of Prag Cap.

    Here goes.

    Home price $200K
    20% down $40K
    Closing costs $5K
    Initial investment $45K
    Interest rate 4.5% (approx. current)

    I am assuming inflation at a constant of 3%, and house appreciation at equal to inflation, as it traditionally has been, the housing bubble excepted.

    I will use an estimate for the local rent rate for a home that could be purchased for $200K in King County, WA, and set that at $1200/mo (probably too low), or $14,400 annually.

    Since I want to compare costs of renting vs owning (ya gotta live somewhere!), and SOME ownership costs will increase, I will not count inflating rents or homeownership costs, though I suspect that rental rate inflation will exceed HO costs, because the cost of interest will not increase for the HO.

    Additionally, since an increasing part of every P&I payment goes to pay down principle, and those payments can effectively be considered savings (at a zero rate of return), I am going to take the TOTAL interest paid over the life of the loan ($131,849), and divide it by 30 yrs, for an average annual cost of $4,395

    Annual Cost of owning

    Interest $4395
    Prop Taxes $2500 (vary from state to state, but that’s about right here)
    Maintenance $2,500 (I think your figure of $400/yr is horribly underestimated, at least in my experience)
    Insurance $500

    Total Annual $9,895
    Renting $14,400 ($1200×12)

    Savings over rent $4,505
    Over 30 yrs $135,150

    So, where are things at the end of 30 years for the average American? First, disappointingly, his house is only worth $200K in inflation adjusted dollars, since they rose at exactly the same rate. If you sold it, you would net approx. $180K, after expenses of 10%. Or, you could borrow against it, for the remainder of your life, in the form of a reverse mortgage, and stay there without a payment. Or you could just pay the annual costs of the taxes, insurance and maintenance until you die, and let the heirs deal with the mess.

    Now, at this point, I start to agree with Cullen. You mean I only netted $135K? Well, there are tax savings, which are significant, but murder to estimate, let’s guess the savings are an additional $15K. There are numerous intangibles, including the ability to gain sweat equity , and pride of ownership. Probably the single most uncounted factor is that buying a home FORCES the average American to save more (by principal reduction payments) than that average American would do voluntarily.

    But here’s where I see the biggest difference.

    Investment gurus like Cullen assume that the average investor will get decent returns, at least equal to the S&P 500. The best info I could get was this study:

    Yoiks! Over the past 20 years, the AVERAGE investor (in mutual funds) got a return of 4.25%, sadly, much less than the S&P average of 8.21% over the same period.

    So, if Joe Average investor, took his $45K initial investment, and achieved the average return of 4.25% compounded and inflation adjusted, he would have a grand total of $64,622, after 30 yrs.

    Meanwhile, Joe Average Homeowner, in addition to being forced to save $160K that he might not otherwise have saved, ends up with a profit of $135,150, less $20,000 in sales costs for a net of $115,150, from the SAME initial investment.

    Double the return of Joe Average investor.

    Keep in mind, Joe Average investor excludes the millions of average income families that have ZERO investments, or stay in the equivalent of all cash (Money Market, CD’s etc.), and while investment gurus hold out the promise that you can make exceptional returns by picking stocks, or any number of strategies, it’s difficult to track that number. I specifically wish to commend Cullen for his ethical approach to providing (or not providing) investment advice, as the case may be.

    To conclude, IF you are a substantially above average investor, (which I assume every single reader of Prag Cap considers themselves to be!), AND an astonishingly disciplined saver, then you may indeed be better off renting, but almost indisputably, the purchase of a home is the wiser use of $45K for the average American.

    Roger Ingalls
    Loan Doctor

  • GYSC

    My thoughts from September 2007:

    Nothing has changed, the one last bastion of middle folks is now dead to boom/bust cycles.

  • Cullen Roche


    Thanks so much for taking the time to go through all of this. It’s my hope that many people will find this post useful and your analysis is a superb contribution there. I guess the big thing I want people to start considering is that their house is an expense and not necessarily an investment in the same sense, that say, private equity is investment. I am a stickler for the word “investment” as you likely know.

    Anyhow, thanks so much. One of the best comments I’ve read anywhere in a long time.



  • Michael Rudolph

    Thanks Collin for a wonderful look at home ownership as (or not as) an investment. I know I spent many years hearing about how ownership is a wonderful investment meaning I can make a profit when I sale. That doesn’t seem to be the case when factoring in inflation and other costs associated with owning a home.

    The big disconnect I see though is that at the end of your loan you actually own a home outright and the rent stops. The next several years you are out taxes and insurance but the longer you stay in your home after its paid for the more cash you save in rents. If you buy your last house say at age 40 and pay it off in 15-20 years this could be several years of “rent free” living.

    Even if you do move to a retirement community or nursing home immediately after the home is paid off the asset is yours to sell and recover your initial investment plus inflation where as the long term renter is left empty handed.

    I’ll agree that home ownership may not be as great an investment as people are led to believe but I certainly think it qualifies as a type of investment and not necessarily a poor one.

  • Michael Rudolph

    Apologies for misspelling your name.

  • Dunce Cap Aficionado

    Unrelated, but-

    “Using a basic amortization schedule it’s pretty safe to assume a monthly interest payment of $800 or $9,600 per year.”

    I would love to pay that in rent….

  • roger ingalls


    That means alot coming from you!

    One of the more important lessons I have managed to learn here is that what most people call investments (401k, IRA, Etrade accounts) are actually savings, trying to stay ahead of inflation.

    I certainly was a part of the crowd calling “home buying” an investment during the bubble, but I am reformed.

  • Andrew P

    This is happening in Japan. The rapidly shrinking population results in more houses than people, and many houses are vacant, and get torn down by the Government.

  • Andrew P

    Houses are a great investment if you can buy foreclosed houses for pennies on the dollar. People did this back in the day of the S&L debacle, when the RTC sold houses for a dime on the dollar or less.

  • Clay C

    You shouldn’t ignore the effect of leverage in the calculations. The analysis that most people do (including the linked article) are only relevant if you pay cash for the house. Most people only put 5-20% into the value of a home. If the value of the home increases 20%, and your down payment was 20%, then you have a 100% return on investment, not a 20% return. The change in real estate value is not relevant, its the growth of your investment that’s the starting point.

  • Klarsolo

    Hi Cullen,

    I love your posts, but I have a question about this calculation.

    If house prices go up with inflation, then that gain is cumulative, while the mortgage costs are fixed and will never rise (some of the other costs will rise cumulatively too, but not the interest portion).

    If we assume that the $ 200,000 house goes up with a hypothetical 4 % inflation for 10 years then it will be worth around $ 300,000. This means that your mortgage payment that used to be 5.5 % of the value of the home initially, now shrank to about 3.7 % of its current value (for the sake of simplicity I’m looking at this as an interest only loan).

    So slowly over time the house becomes a better and better investment, provided that it does track inflation and you have a 30 year fixed loan. Am I wrong?

  • Donald Johnson

    I am one of those folks who actually TRACKED all of my expenses, applied the interest and partial prop tax write-offs, calculated the return on my down payment and in the end: paid $174,000 in 1994/Sold for $320,000 (after finally waking up, as the house at one time, just a few years earlier, was worth easily $$520K)in 2009— and our net over that long duration was about $35,000. There were some huge expenses, including a tree through the roof of one of my two out-buildings, replaced well pump, septic system and re-painting five times…trim each year! That is not a great return on my $29K down payment. The land dropped in value alone and the extra out-building we built for wood storage, were WORTHLESS!

  • Ivan

    Cullen you are missing the rent. Not paying a rent is an implied income from the asset. Equivalently if you rent it out, you receive an actual income.

    And rent must track inflation over the long run, more or less. Whereas the mortgage cost is fixed.

    The real way to do this is to pv the rents minus costs to infinity (including inflation) at the average opportunity cost of the market (sensible discount rates are the mortgage rate or the (net of tax) rate on long term securities with equivalent risk, say 30-yr t-bonds for cash buyers).

    In most areas of the US I believe prices kind of makes sense (financially) at the moment based on that analysis. I’m pretty sure they were entirely absurd in 2007.

    Of course there are also intangible benefits but the DCF approach gives a basic idea of where the price “should be”.

  • Correcto

    This is a great post. Some things people often forget in these conversations. The math should include not just closing costs for the purchase but for the sale. In NYC, for instance, these are considerable—and calculated as a percentage of the final price (after any appreciation). Move a few times as your family grows and transaction costs accrue. It’s true that if one lives in a home for the life of the mortgage, one can then live “rent free.” But most people do not do this. (As someone pointed out, the tax incentives favor starting a new mortgage.) But mostly things happen and people have to move.

  • Michael Rudolph

    I’m sure you’re right that most people don’t do get to live in a paid off house for long. The ones that move though often profit on the sales. I know my parents moved several times into larger houses or better neighborhoods and always made money on their sales. After 4 or 5 moves this was quite a lot of money. They retired in a large house in a great neighborhood and were able to put down a substantial deposit from their profits. Were it not not for all the money they made on their homes they would have never been able to afford that house. Money can be made buying and selling homes as well as saved from staying in one. The only one who profits from renting are the landlords.

  • JB

    I think this analysis is incomplete. You need to take into account the opportunity cost of investment in the house itself. As you noted, the down payment could have been invested in the stock market had you rented, but so could the portion of each mortgage payment constituting principal. For your $115,150 versus $64,622 comparison, it seems to me you’re comparing the investment return of just the foregone down payment to the return of all principal payments, but in the former you should be including the foregone principal payments (assuming the principal plus interest exceeds than rent, and if that’s not true then the whole exercise is pointless because owning is almost always going to be the better deal under those assumptions) and in the latter the down payment. If the return on such investment is substantially higher than the return on the house, the renter can come out ahead. It’s all very fact-specific, but I think in the end your analysis is going to come to the realization that purchasing a home where the opportunity cost for investment is low and where total annual cost of home ownership is equal or less than total annual rent for equivalent housing, then owning can be a good investment, but where said opportunity cost is high or renting is MUCH cheaper than buying, then renting can be the better investment strategy.

  • roger ingalls


    Thanks, you have a point that the principle payments that are earning nothing probably should be applied to the “opportunity costs”,but I still believe that the average American is going to be better off buying a home (subject to certain conditions and limitations), in addition to his other investments.

    Its worthwhile to note that a home is a highly illiquid investment, and you likely would not sell when you should (like me not selling in 2007), and could buy when you should not.

    Whenever I start a conversation with a would be first-time homebuyer, I tell them what it costs to sell. That is usually an eye-opener!