Homes Are A Good Investment

Home ownership not only provides a permanent place to call home and personal satisfaction, it is also a solid investment. The value of a home is likely to increase steadily over time without the extreme ups and downs associated with many other investments and home owners enjoy exceptional tax benefits. A home purchase also allows the buyer to leverage his (her) funds by investing only a portion of the purchase price and earning returns based on the total value of the house.

Homes generally increase steadily in value unlike riskier investments that can become worthless virtually overnight. A new home purchased in 1977 for the median price of $48,800 was worth $150,707 in 1997. (This example is based on national statistics. Housing appreciation rates and economic conditions in individual housing markets may vary considerably.) A home is a relatively stable investment and probably will not earn spectacular returns like some other investments, such as stocks, but owning a home is less likely to show dramatic declines often associated with stocks and other investments.

To illustrate a comparison between the value of owning a home and buying stock, consider the market during the past 28 years. The value of housing has experienced some ups and downs in individual housing markets, but the housing price appreciation on a national basis has been stable and reliable, averaging 6.5 percent annually. The largest annual increase in prices of existing homes was 14 percent; the smallest was 2 percent. During that same period, average stock values have increased by as much as 35 percent in one year and dropped by as much as 24 percent. The average annual increase in the New York Stock Exchange Price Index was 6.9 percent from 1969 to 1996. Average stock values dropped in 8 of the 28 years.

In addition to being a good investment, owning a home provides unique income tax benefits. The mortgage interest and property taxes homeowners pay yearly are deductible on income tax, and the profits of up to $500,000 on the sale of a principal residence are excluded from tax on capital gains. Stock dividends are subject to income tax, and profits on the sale of stocks, bonds, and other investments are subject to a 20 percent federal tax rate for most investors.

Another benefit to home ownership is leveraging. A buyer can purchase a home with a cash down payment that is only a small fraction, as little as 10 percent or less, of the total purchase price, but the return is based on the total value of the property. This is called leveraging an investment, and it makes the rate of return on a home much greater than on an equivalent investment where the buyer must put up the entire purchase price.

If a buyer makes a down payment of $10,000 on a $100,000 home and the home's value increases to $105,000 during the first year of ownership, then the home owner's equity (the value of the home minus any mortgage debt) has increased from $10,000 to $15,000. That is a 50 percent increase in just one year.

Home ownership helps build a healthy economy. Most Americans purchase a home as the first step toward accumulating personal wealth, and a home is usually their primary source of net worth. In 1993, home equity accounted for 44 percent of the nation's total net worth. The rest of the investment options were distributed: 11.4 percent in interest-earning assets; 11.3 percent in other real estate; 8.3 percent in stocks; 6.7 percent in IRA or Keogh funds; 6.4 percent in vehicles; 6.4 percent in businesses; and 5.1 percent in other assets.

Looking at home ownership as an investment is only one way to analyze its value. Owning a home provides a valuable place to live that no other investment can match.