The Home You Live in Is Probably a Poor Financial Investment. Here’s Why…

Let me start off by saying I think home ownership is incredibly important. Home is supposed to be a warm, loving place where we can relax and enjoy our time. Buying a home is an exciting milestone in the lives of millions. The purpose of this article is to show the true cost of ownership and why it’s not a “great investment” like you may have been told. I don’t believe renting is better and I’m not devaluing home ownership, I am just presenting the reality of home ownership in today’s market.

Let’s Look at the Numbers

What is the true cost of owning a home? Is it a good investment over the long term? According to The St. Louis Fed or “FRED Economic Data”, the median sale price for a home in the United States at the end of 2023 was $417,700. For math’s sake, let’s use $418,000 as our “median home price”.

Median Home Price: $418,000

Great! Now let’s see what interest rates are looking like today. According to MortgageNewsDaily.com, the 30 year fixed rate mortgage (the typical mortgage product for homeowners) is at 7.08%.

Today’s Interest Rate: 7.08%

Now let’s determine what we should put as our down payment. Frequently, first time home buyers will see real estate professionals and lenders post “You only need 5% down to buy a home!” So, let’s use 5%.

Down Payment: 5%

With those three factors we can determine what our monthly mortgage payment is going to look like with principal and interest (P/I). Our 'loan amount” is going to be the home price ($418,000) - our down payment ($20,900) = $397,100.

Fantastic! Now let’s look at the cost of owning this home over different periods of time. We can do this by using an amortization schedule. An amortization schedule is a chart which breaks down your loan payment into parts. These ‘parts’ are typically the total payment, called an installment, which is then broken down into the principal and interest. An example is featured below in Figure 2.

The Long Term Look at Mortgage Payments

The chart above tells us that our yearly mortgage payments (installment payments) will total $31,959.43. Because we are using a fixed rate mortgage, we know that our installments will remain the same over the entire life of the loan. Let’s see how these payments stack up when owning for 1, 5, and 10 years of time.

Determining Our “Break-Even Point”

With this information we can now determine what we would need to sell our home in order to break even. First, remember we paid $20,900 for our down payment. Then each year we paid $31,959.43 on the mortgage. Let’s do some simple addition to find our break-even points.

With the break-even values known, we need to figure out how much our home is going to be worth over these same periods of time. Homes are an appreciating asset, so we need to account for that increase in value. A quick search will tell us that homes appreciate, on average, 4.8% each year. For simplicity, let’s use 5% appreciation:

Purchase Price Today: $418,000
After 1 Year: $438,900.00
After 5 Years: $533,485.69
After 10 Years: $680,877.95

It appears that over each of these time periods, our home won’t reach our break-even point. However, there is more to this story. Using a simple mortgage payment calculation is a great start, but it does not paint the entire picture.

Don’t Forget about Taxes, Insurance, & Maintenance

Let’s get into the real meat and potatoes of this analysis. In our oversimplified calculation above, we didn’t account for a handful of additional expenses a homeowner should expect over the years. Some of these expenses include property taxes, insurance, HOA, utilities and maintenance. On average, these are as follows:

Yearly Expenses:
Maintenance (1% of sale price per year): $4,180
Taxes (Charleston County): $2,133
Insurance: $1,759
HOA: Let’s say none for this example
Utilities (Eletric, water, sewer, Internet/Cable) SC Average: $5,133

Total: $13,205 per year.

Let’s add this total to our previous break-even points. In these columns “Break-Even” will be abbreviated to “BE”

Let’s remind ourselves of the new value of our home after each time period when accounting for appreciation.

Purchase Price Today: $418,000
After 1 Year: $438,900
After 5 Years: $533,485.69
After 10 Years: $680,877.95

Final Calculation:

After each of these holding periods, we see how the home we purchase doesn’t equate to a “great financial investment”. Make note that this calculation does not include inflation, or sales commissions paid when selling a home. Remember, home ownership is important, and I think everyone should strive to own a home. Just keep in mind that the home you live in is hardly an investment, let alone a good one.

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