Is Homeownership Still a Worthwhile Investment?

Historical Performance of Real Estate

In general, the value of a home will grow over time. This is a concept most people are familiar with, especially when considering the recent effects of inflation on the real estate market. However, discrepancies can arise when both home prices and household incomes are increasing, but they are not doing so at nearly the same rate.

The average cost of a home in 1960 was $11,900. The median annual household income at the time was around $5,600. This means the average price of a home was approximately 2x a family’s annual income. Fast forward to 2022, when the average cost of a home was $384,000, with a median household income of $74,000. Over the decades, home prices had increased to an average of 5x a family’s annual income, indicating that housing costs were growing at a faster rate than overall wealth.

Meanwhile, despite the rising costs, homebuying has continued to serve as an effective tool for building wealth. Some people even view houses as ‘forced savings accounts,’ because the traditional mortgage structure essentially ‘forces’ you to save. Each month you pay your mortgage, you’re lowering your debt and increasing your equity in your home. Paying down your debt, coupled with the gradual rise in home values, means that over time your housing investment grows more profitable. From there, you can theoretically sell for wealth gains, or take a loan based on its equity. That money could be used to purchase other properties, or to make further improvements to your home — increasing its value even more.

The Current Real Estate Market

The American housing market experienced its biggest shakeup since 2008 when COVID-19 arrived in early 2020. To keep the economy stimulated, the Federal Reserve dropped the Federal Funds Rate, and the effects rippled out to mortgage rates. After a decade of consistent 3.5% to 5% average rates for 30-year fixed mortgages, those numbers dropped to around 2.5% to 3.5% in 2020 and 2021. 

People around the country used this opportunity to find houses better suited for work-from-home set-ups, and made buying choices in pursuit of more space, bigger yards, and relocations to areas outside crowded city centers. With demand skyrocketing and options decreasing quickly, people were willing to pay thousands of dollars over the asking prices for the houses they wanted — resulting in a sharp rise in home values. 

In 2022, interest rates started rising steadily from that coveted 2.5% to upwards of 8% by the end of summer 2023. Since then, home values have stayed high, even though sales have slowed and availability has dropped in most areas. 

The Federal Reserve has indicated it will slow down interest rate hikes moving into 2024, though that is subject to change based on several economic factors. If those hikes cease — or interest rates even begin to fall — we could potentially see mortgage rates start to drop as well. 

Keep in mind that home prices and trends vary greatly depending on the city, state, and region of the country. If you’re looking for a home in a particular area, look at recent data detailing the current housing market in that location.

Benefits of Homeownership as an Investment

Owning a home can be a valuable investment, as on average, homeowners have a net worth 40x greater than non-homeowners. 

While we’ve already mentioned the importance of appreciated home value in building wealth, there are a few other benefits to consider:

Tax Benefits

Homeowners can potentially deduct certain costs associated with homebuying from their taxes, but only if they itemize their return. These deductions may include:

• Mortgage interest (for mortgages up to $750,000)
• State and local real estate taxes (up to $10,000 a year)
• Discount points
• Private mortgage insurance
• Medically necessary home improvements (such as installing ramps or lowering cabinets)
• Moving expenses (only for active duty military members)

Sense of Community

People can feel more included in their community when they purchase property. It’s a more permanent decision than renting, and for some families this is an important distinction. If you’re eager for a place to put down roots and build longer-lasting relationships, homeownership can help satisfy those needs. 

Diversification

Whether you’re only interested in owning the home you live in, or you’d like to purchase an investment property, real estate is a common avenue for diversifying your portfolio. Properties can hold intrinsic value. Because real estate involves tangible assets — buildings and land — it will always be worth something. Many real estate sectors have also proven resilient in the face of recessions, economic downturns, or market volatility. 

There are many ways to incorporate real estate investing into your portfolio, aside from owning your first (or second) home. If you’d like to invest in real estate without the time and capital commitment of purchasing a property outright, you and your advisor might review some other options:

• Real Estate Investment Trusts (REITs)
• Real Estate Limited Partnerships (RELPs)
• Real Estate mutual funds
• Real Estate ETFs
• Mortgage-backed securities

Considerations for Prospective Homebuyers

While there are undoubtedly several benefits to homebuying, it’s essential to also consider the drawbacks and challenges of buying real estate.

Homebuying requires a substantial financial commitment — both initially, and in an ongoing manner. A recent survey found that people spend an average of $17,459 annually for home-related expenses, which might include maintenance, taxes, HOA fees, etc. Additionally, it is perhaps worth mentioning that this amount is more than what 90% of respondents had anticipated spending.   

Regarding the actual home purchase process, some first-time buyers are caught off guard by the additional expenses that make up closing costs. These can include:

• Mortgage application fee
• Credit report fee
• Real estate attorney fee
• Escrow or closing fee
• Homeowners insurance
• Title insurance
• Mortgage origination fee
• Discount points (if applicable)
• Appraisal fee
• Transfer tax
• Underwriting fee

Altogether, homebuyers should expect to pay between 3% and 6% of the home price in closing costs. For perspective: if you’re purchasing a home for $500,000, that equates to closing costs upwards of $30,000.

Emergency Repairs

When you own your home, there’s no landlord or management company to call when a pipe bursts — you’re responsible for all maintenance and emergency repairs. This can potentially be costly and inconvenient, especially if (and when) issues arise unexpectedly.

With this in mind, homeowners would benefit from creating a second emergency fund dedicated solely to unexpected home repairs. Set aside enough savings to help cover the cost of your insurance deductibles, potentially living in a hotel for a few nights, replacing a major appliance, etc. 

Location

Where you buy a house will have a significant impact on its future value. Even if you maintain your property and keep it updated, you don’t have control over your surrounding neighborhood or town. It’s possible that the housing market in your area could suffer, and your home will lose value as a result.

With an increase in climate events like wildfires, floods, hurricanes, and tornadoes, you’ll also want to consider the possibility of future damages to your property, or extra costs associated with insurance in an area prone to disaster.

What About Renting?

With the currently high interest rates and competitive housing market, is continuing to rent simply a better option? The answer is: it depends on your goals and financial circumstances.

Renting can be flexible, with the ability to live on a monthly or yearly lease. If you have to move often for work, or you’re not yet sure where you want to establish a more permanent living situation, renting may be a better option than buying. Renting also usually means you’re not responsible when something goes wrong on the property — an appliance breaks, a pipe bursts, the roof leaks, etc. Those considerations are generally handled by the landlord or management company, meaning you won’t take the financial hit required to address and correct an issue.

Some people choose to rent and use the money they’d otherwise spend on home maintenance or property taxes to invest. Investing is another way to grow wealth, which could eventually result in enough money to afford a down payment on a home and all associated closing costs.

Thinking About Buying a Home?

Homeownership offers a multitude of financial and emotional benefits. It’s an important milestone for many families, and it can help you feel more financially secure. If you’re thinking about purchasing a home — either for yourself or as an investment — carefully consider your own financial goals and lifestyle preferences. It’s a big commitment, and will require ongoing care. 

To fully understand the potential benefits of homebuying as an investment, you may find it helpful to speak with a knowledgeable financial advisor first. We encourage you to schedule a call with our team today to explore your options and arm yourself with the information that can help you make informed decisions around purchasing a home, and beyond.