The New York Times published a front page article recently entitled in the print edition “Your Home as Sure Nest Egg? That Era Is Over, Analysts Say.” I’m not sure what “era” they are talking about. As I said in Stop Acting Rich, overall single family, owner occupied homes were never the so-called nest egg that many people thought they were. According to The New York Times’ article, even during the rosy days of residential real estate the inflation adjusted appreciation was only 4% per year. In an earlier blog, I mentioned the false premise that many homeowners operate under when assessing the appreciation of the value of their homes. Most homeowners merely look at what they paid initially for a home and the market price or sales price 10, 20 even 30 years later.
But what happens if they add to the purchase price all of those property taxes that they paid over the years, the mortgage interest which ultimately may be equal to two or more times the purchase price of a home, homeowners insurance, painting, roof repairs and replacement, new gutters, plumbing repairs, updated appliances and repair, lawn maintenance, tree pruning and removal, maintenance of heating/air conditioning, updated interior decor, and utilities. Ah, the joys of home ownership!
Realistically what does a home provide its owner? Beyond the genuine pride of ownership and the feeling of security, it provides a method of forced savings. Most people in this country do not have the discipline to save and invest. But many of them are required to make mortgage payments. And some portion of this will be returned to them when they sell their home. There is nothing wrong with living in a modest home, one you can easily afford. The market value of a typical millionaire next door type’s home is less than 20% of his total net worth.
There was a period from the mid to late 90s up until 2006 when the market value of homes did nominally increase. This was artificial because many homebuyers were not required to put even $1 down on their homes. Demand at the bottom spreads up through the top. As I said in the blog cited above between 2000 and 2006 the number of homes with a market value of $1M or more increased at an incredible 3 1/2 times while only 8% of this increase was accounted for by new construction. All the rest came from so-called appreciation. We know now that it was false appreciation. And today the number of $1M homes in this country [realistically appraised] is back to the early 2000 market size.
An excellent discussion of this topic is provided by Jonathan Clements in his Wall Street Journal article, “Forget the Mansion: Why Buying Bigger Doesn’t Guarantee a Rich Retirement.”
2 thoughts on “The Real Cost of Homeownership”
This is an excellent article. Stop Acting Rich is sitting on my pile of to be read books, so I’m not sure if the answer is in it, but I’ve always wondered if there is data on the tax savings. I’ve always used the 4 percent number with my financial planning work, but I can never quantify the additional savings of being able to itemize taxes. Most employed people would probably not be able to itemize without the interest deduction so I’m curious if that 4 percent figure is actually a bit greater. To your knowledge has this research been done?
I tell the people that I advise that home values rarely appreciate. They more often inflate. I also tell them that $10,000 in mortgage interest will only save $3500 in taxes if one is in the 35% tax bracket. The point is that homeownership is like any other investment and if you buy more home than you need, the home will own you instead of vice versa. I am a firm believer in purchasing an appropriately sized home (based on income) when the purchaser can obtain the home without incurring financial stress.