In recent years, the housing market has witnessed unprecedented home value appreciation. We’ve seen national appreciation rates of 12% in 2022 and 16% in 2021, preceded by several years of increasing prices, starting in 2012. However, starting in 2019, we started to really see the craziness, that continues in some instances today. Massive over bids, acceleration clauses, appraisal guarantees, and whatever else a buyer could do to make their offer stand out from the rest. This rollercoaster ride has left many potential buyers, especially first-time buyers, wondering whether a house remains a good investment.
When posed with this question by individuals contemplating entry or re-entry into the housing market, I typically respond that it depends on their specific circumstances. However, on the whole, I believe that, yes, a house still represents a sound investment. There are several reasons supporting this perspective.
First and foremost, unless you plan to reside in your parents’ basement indefinitely, housing isn’t free. Whether you pay a mortgage or rent, you have a monthly housing expense. Consequently, after 30 years, you can either have a valuable piece of property (likely worth considerably more than your initial investment) or nothing at all. Moreover, if you continue to rent, you’ll have ongoing monthly expenses for the rest of your life, whereas homeownership typically means your payments end once the mortgage is fully paid off—a substantial benefit during retirement.
Consider, too, the impact of inflation. Over the next 30 years, you’ll be making mortgage payments. With a fixed-rate mortgage, your principal and interest payments remain constant. As the value of the dollar diminishes (historically, it has experienced a 3% inflation rate over the past three decades), your mortgage payments become progressively less expensive in real terms. In contrast, if you rent, your rental costs will increase in line with inflation, often around 3% annually. So, while renting may appear cheaper than a mortgage at present, how long will that cost advantage last?
Let’s explore a hypothetical example: Assume you can buy a house with a $1,500 monthly payment or rent for $1,300 per month. If your rent only adjusts according to inflation, with the traditional 3% annual rate, by year 5, you’ll be paying $1,507 per month. This means that for the first 5 years, renting may have saved you money, but for the subsequent 25 years, your rental costs will surpass the mortgage payments. After 30 years, you could potentially have no housing-related expenses whatsoever.
In conclusion, while house values do play a crucial role, they shouldn’t be the sole determining factor when assessing whether real estate is a worthwhile investment. If you’re contemplating a home purchase, whether as a first-time buyer, someone re-entering the housing market, or as an investor, I recommend reaching out to a mortgage professional to crunch the numbers. You might discover that homeownership is a more viable and lucrative prospect than you initially thought.
If you’d like more information on whether buying a home is the right move for you, please don’t hesitate to contact me.