Why do some people say a house "not an investment"?

Question

I have heard a few people say that "a house is not an investment" as an argument to stay in an apartment. (To me, this seems like a stupid reason, but that is not my question.)

Of course, this is not the only place I have seen this argument. I've seen some scammy TV commercials trying to sell financial advice claiming the same thing.

So, the way I see it, I'm building up equity. When I need to, I can use the house as collateral, or I can buy a new house with that equity,, etc.

So, why do people say that that isn't an investment?

Answer 1

The below assessment is for primary residences as opposed to income properties.

The truth is that with the exception of a housing bubble, the value of a house might outpace inflation by one or two percent. According to the US Census, the price of a new home per square foot only went up 4.42% between 1963 and 2008, where as inflation was 4.4%. Since home sizes increased, the price of a new home overall outpaced inflation by 1% at 5.4% (source). According to Case-Shiller, inflation adjusted prices increased a measly .4% from 1890-2004 (see graph here).

On the other hand your down payment money and the interest towards owning that home might be in a mutual fund earning you north of eight percent. If you don't put down enough of a down payment to avoid PMI, you'll be literally throwing away money to get yourself in a home that could also be making money.

Upgrades to your home that increase its value - unless you have crazy do-it-yourself skills and get good deals on the materials - usually don't return 100% on an investment. The best tend to be around 80%.

On top of the fact that your money is going towards an asset that isn't giving you much of a return, a house has costs that a rental simply doesn't have (or rather, it does have them, but they are wrapped into your rent) - closing costs as a buyer, realtor fees and closing costs as a seller, maintenance costs, and constantly escalating property taxes are examples of things that renters deal with only in an indirect sense.

NYT columnist David Leonhart says all this more eloquently than I ever could in:

• Is it better to buy or rent?
• A word of advice during a housing slump: rent
• But then using his own criteria, eventually determined that it was acceptable to buy for reasons other than money without losing money and wrote about it in As markets fizzle, buying may cost less than renting.

There's an interactive calculator at the NYT that helps you apply Leonhart's criteria to your own area.

None of this is to say that home ownership is a bad decision for all people at all times. I'm looking to buy myself, but I'm not buying as an investment. For example, I would never think that it was OK to stop funding my retirement because my house will eventually fund it for me. Instead I'm buying because home ownership brings other values than money that a rental apartment would never give me and a rental home would cost more than the same home purchase (given 10 years).

Answer 2

When I purchased my house I struggled with this same idea. I felt sick to my stomach signing a contract stating how much money I now owe a bank. However, the lawyer I was using put it in terms that eased the nausea a little (I still hate owing that much money - but it's a little more palatable).

His words, paraphrased: At the end of the day, you have to have a place to stay. Your mortgage payment is replacing your rent except in this case, you're paying yourself instead of someone else. You lose a little flexibility in being able to up and move with relative ease. However, you've lived in apartments, you know that rent almost only goes up. Your mortgage will not.

He wrote out some numbers and basically showed that everything evened out except mortgage payments will give you property as opposed to paying for someone else's property.

To answer your question though - others have already stated - you'll get a better return in the stock market (usually). But unless you're really really bad at real estate evaluation - you should make some money off your house when you decide to sell.

Answer 3

A house is a funny kind of investment. Normally when you invest, you do it to make money. The return on a house, though, isn't principally real money, it's the imputed rent - money that you would have needed to pay to rent the house. The thing about this imputed rent is that you consume it right away. Getting a bigger house and putting more money into it doesn't save you any money, it's just a way to consume more "house" - so, unlike regular investing, it's not really responsible and doesn't contribute to your financial well-being.

Answer 4

With an investment, you tend to buy it for a very specific purpose, namely to make you some money. Either via appreciation (ie, it hopefully increases value after you take all the fees and associated costs into account, you sell the investment, realise the gains) or via a steady cashflow that, after you subtracted your costs, leaves you with a profit.

Your primary residence is a roof over your head and first and foremost has the function of providing shelter for yourself and your family. It might go up in value, which is somewhat nice, but that's not its main purpose and for as long as you live in the house, you cannot realise the increase in value as you probably don't want to sell it. Of course the remortgage crowd would suggest that you can increase the size of the mortgage (aka the 'home atm') but (a) we all know how that movie ended and (b) you'd have to factor in the additional interest in your P&L calculation.

You can also buy real estate as a pure investment, ie with the only objective being that you plan to make money on this. Normally you'd buy a house or an apartment with a view of renting it out and try to increase your wealth both due to the asset's appreciation (hopefully) and the rent, which in this scenario should cover the mortgage, all expenses and still leave you with a bit of profit.

All that said, I've never heard someone use the reasoning you describe as a reason not to buy a house and stay in an apartment - if you need a bigger place for your family and can afford to buy something bigger, that falls under the shelter provision and not under the investment.

Answer 5

"Your house is not an asset, it is a liability. Assets feed you. Liabilites eat you." Robert Kiyosaki

From a cash flow perspective your primary residence (ie your house) is an investment but it is not an asset. If you add up all the income your primary residence generates and subtract all the expenses it incurs, you will see why investment gurus claim this. Perform the same calculations for a rental property and you're more likely to find it has a positive cash flow. If it has a negative cash flow, it's not an asset either; it's a liability. A rental property with a negative cash flow is still an investment, but cash flow gurus will tell you it's a bad investment.

While it is possible that your house may increase in value and you may be able to sell it for more than you paid, will you be able to sell it for more than all of the expenses incurred while living there? If so, you have an asset.

Some people will purchase a home in need of repair, live in it and upgrade it, sell it for profit exceeding all expenses, and repeat. These people are flipping houses and generating capital gains based on their own hard work. In this instance a person's primary residence can be an asset. How much of an asset is calculated when the renovated house is sold.

Answer 6

I think the claim is that you shouldn't buy a house expecting it to increase in value as you would a stock portfolio. OTOH if you are looking at it from the stand point of "I need housing, mortgage payments and rent are comparable and I build equity if I buy a house rather then rent" that's potentiality a very different situation (that I'm not qualified to judge).

Answer 7

One reason I have heard (beside to keep you paying rent) is the cost of maintenance and improvements. If you hire someone else to do all the work for you, then it may very well be the case, though it is not as bad as a car.

Many factors come into play:

1. Purchase price (of course)
2. Location
3. Age of the house
4. Quality of the construction
5. Who does the work

If you are lucky, you may end up with a lot that is worth more than the house on it in a few decades' time.

---

Personally, I feel that renting is sometimes better than owning depending on the local market. That said, when you own a home, it is yours. You do have to weigh in such factors as being tied down to a certain location to some extent. However, only the police can barge in -- under certain circumstances -- where as a landlord can come in whenever they feel like, given proper notice or an "emergency." Not to mention that if someone slams a door so hard that it reverberates through the entire place, you can actually deal with it.

The point of this last bit is the question of home ownership vs renting is rather subjective. Objectively, the costs associated with home ownership are the drags that may make it a bad investment. However, it is not like car ownership, which is quite honestly rarely an invesment.

Answer 8

You're hearing alot of talk about housing (and by implication property) not being an investment today because on the downside of a market, the conventional wisdom is to be negative about buying things that have lost value. Just as it was dumb to listen to your coworker about hot .Com IPOs in 1999, it's dumb to listen to the real estate naysayers now.

Here's another question along a similar vein: Were stocks a good investment in the spring of 2009?

The conventional wisdom said: "No, stocks are scary! Buy T-Bills or Gold Bullion!". The people who made money said: "Wait a second, Goldman Sachs is down like 75%? IBM is down like 30%, are they going anywhere? Time to buy."

The wrong house is a poor investment in any economy. Buying a house in Detriot in 1970 was not a good move. Buying a house that needs $50k in work, not a good move. Buying a condo with a bankrupt HOA in Florida is not a good idea. But a good house that is well cared for is a great investment.

I'm living in a house right now that is 80 years old, well maintained and affordable on a single income. A similar home a few blocks away sold in May for the same price as we paid in 2006. I'm paying about 20% less than I would for an apartment, and we'll think about moving in 2016 or 2017, by which time I'll probably have put $30-50k into the house. (Roof, kitchen, exterior painting, minor renovation)

Answer 9

I invested in single family homes and made ok. Houses can be an investment. (though the OP seems to equate "house" with primary residence)

Just like any other investment buying houses has risks.

I would not treat your primary residence or a vacation home as an investment. That is asking for trouble, but for many many years it was safe to assume that you would make a good return on it, and many people did.

If you evaluate the numbers for purchase price, rental market, etc and find that rentals or flipping is worth your exposure then by all means, do it. But treating your primary residence as an investment apparently is what that comment means.

Just like the stock market, many people have gotten wealthy on homes and there are lots of people who lost their shirts.

Answer 10

There's an old saying: "Never invest in anything that eats or needs maintenance."

This doesn't mean that a house or a racehorse or private ownership of your own company is not an investment. It just points out that constant effort is needed on your part, or on the part of somebody you pay, just to keep it from losing value. Common stock, gold, and money in the bank are three things you can buy and leave alone. They may gain or lose market value, but not because of neglect on your part.

Buying a house is a complex decision. There are many benefits and many risks. Other investments have benefits and risks too.