My Home is My Most Significant Investment

In most markets for as long as we have data, buying a home is a great hedge against inflation.  That is it.  End of story.  It is not a very good investment in terms of capital appreciation because you cannot expect to earn a premium above inflation.  This is not true for every market, especially those in urban centers that become “premium” real estate.  You probably have heard of an old couple that purchased a home for $25,000 “just after the war” and the heirs sold it in 2015 for $200,000.  At first glance, that looks like an awesome investment.  What we forget is that 70 years is an amazing length of time to hold an investment.

Even Mr. Buffett would approve of that holding period.  Over the past decade, inflation has been around 2.1% on average.  Over the same period, the original $25,000 would have compounded to the final selling price of the home in a bank account earning about 3%.  We can infer from this that our homeowners had a real gain of just under 1%.  That is not correct.

That inference is based inflation for the last decade, which has been low by historical standards.  If we look back over the history of the CPI, we find that the average is something like 3.2%.  Holding the home for 70 years actually reduced the purchasing power of the original sum.  This may not seem logical, but, by now, I hope I have convinced you that the magic of compounding is real.  Inflation is compounding.  On a final unhappy note, our homeowner most likely financed the home with a 30-year mortgage, which means compounding interest was paid to the bank.

The above information is not meant to disparage owning a home.  Renting is a colossal waste of money, none of your investment is returned, and your principal vanishes instantly.  Your best financial decision is usually to buy a home at a good price with as much down as you can manage with the shortest mortgage you can get.  I want to discourage, you, however, form including the value of your home in your retirement portfolio calculations.

I believe that doing so provides you with a false sense that you are doing better than you are.  Unless you plan to sell your downtown New York City real estate and move to a small town in the Midwest when you retire, you will not be able to consider the home as a liquid asset anyway.  You need it to live in.  You may be able to downsize in the future and realize some profits, but I would not include that prospect in your investment plan.  This may be the ultimate in single asset risk.


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Last Updated: 6/25/2018

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