So you think it’s such a great decision to buy a house? Well, you need a place to live, and it’s better to own, right? Well, the cost of owning a home is something rarely described by proponents. Buy at $300,000, sell at $1,000,000 thirty years from now (an average 5.66% annual growth rate) for a total of a 233% increase.
The Wall Street Journal says this simplification not only doesn’t tell the real story, it’s grossly misleading.
Banking Deal: Earn 1.55% APY on an FDIC-insured savings account at CIT Bank.
Would invest $300,000 in an index mutual fund — averaging anywhere from 8% to 10% over 30 years — if over that 30 years, you had to pay $710,000 in fees? Well, that’s what you’re doing when you buy a house.
This graphic comes from the Wall Street Journal article. Your friends who like to boast about the return on their real estate generally take into account only the purchase price and the sale price. As you can see, if you actually take all the costs of maintaining that house into account, the “investment” doesn’t look nearly as good.
The figures above also ignore the selling cost. If you want to realize any profit, you have to sell your house, and going through a real estate agent may cost you 6% of your selling price.
The article rebuts all of the familiar arguments about the supposed almost-guaranteed return of real estate. The bottom line is you can’t count on real estate — especially primary real estate, the house in which you live — as your only method of investing for retirement. If you want to realize any of the profit when you retire, if there is any, you’ll have to find a way to downsize your living significantly.
By the way, if you plan on moving within 7 years like the average homeowner, renting and investing the funds you would have otherwise used for a down payment would be a better financial decision. Not only that, but with a long-term mortgage in which you’re paying almost exclusively interest to the bank on your mortgage, you’re just renting your house from the bank. And you still have to pay all the maintenance costs, taxes, and everything else outlined in the chart above.
There are more detailed figures in the Wall Street Journal article.
Updated October 21, 2015 and originally published March 15, 2007.