When your house isn’t a great investment anymore

Tldr - everybody has heard that houses are great investments…. But are they still great investments? When are they not great investments? In our blog post today, we’ll walk through the 7 times houses aren’t a great investment spanning from financial, economic, or personal considerations.

What home ownership looks like today

Covid kicked off a housing frenzy as many Americans made quick decisions to move out of their rented urban apartments to buy homes in suburban neighborhoods with extra bedrooms and spacious backyards. In the years since, there’s been a new influx of people moving into or back to cities like NYC and SF.

Before covid, home ownership averaged 33% across millennials and jumped to 35% to 60% for adults between 25 to 39. Home ownership in high cost of living regions are still a stretch in places like California, where the first time home buy age is still averaging 49 years old.

Source: Statista

Why people say your house is a great investment

Nationally, it’s true that homeowners tend to have a higher net worth than renters. And for many older generations, buying a house was a write of passage for entering adulthood and usually a critical stepstone to building wealth. 

And there’s a good reason for that. For most everyday families, a house is the primary way that you access “leverage” for an investment. Said in another way, it’s one of the rare times where you get support to punch above your weight class. 

Here’s how leverage works

• A stock investment: 

  • Let’s say you’ve saved $100k and invest it in the stock market. To make it simple, let’s say your investment portfolio grew 5%. You’d have earned $5k and now your portfolio would be worth $105k.
    
    

• Vs. a house

  • Let’s say you used that same $100k for a down payment on a house. And you put 20% down. That means you’d have bought a house worth $500k with an investment of $100k. For sake of comparison, let’s say your $500k house grew 5%, you’d have gained $25k and now your house would be worth $525k.

Houses and the stock market very rarely ever have the exact same return rate (since lots of things can impact each). But with this example, your house could earn just 1%, and you’d still be “equally” well off than your stock portfolio that earned 5%. That’s the power of leverage.

Not all debt is leverage

Not all debt works like that. The four most common loan types for individuals are mortgages, car loans, credit card loans and student loans. Car loans go towards items that cars that usually go down in value. Credit card debt often go towards life expenses that include food, medical care, clothing, etc. And while student loans are an investment in your career, it’s not as easy to measure as a house mortgage.

When your house isn’t a great investment

The world has changed and the economic factors that made home ownership a slamdunk for other generations, may not necessarily apply for ours. Here are the [insert number] times your home may no longer be a great investment

You live in a high cost of living city, and housing prices have gone up a lot recently.

Cities with high cost of living often have more people looking to buy, than there are people looking to sell. Whenever there are more buyers than sellers, that pushes the market higher as people bid up the prices in order to buy the house. When there are more sellers than buyers, sellers may be more willing to discount listing prices in order to sell the house.

Source: redfin

Taking San Francisco as an example, median home prices have range from $1.2M to $1.6M over the past 5 years and moved back and forth a lot. That’s an almost 30% spread in home prices, so if you had bought your house at the bottom, you’d have made a great investment. If you bought in the peak of covid, you’d have actually lost money on your investment. 

Damien, a financial blogger, transparently shared his personal story of buying a 2 BD in DC in ‘07 with a mortgage that was $300 lower than rent… when the value dropped 40%, he ended up paying more for the mortgage than rent would have been for years (source: wealth noir). 

So instead of trying to time the housing market, it could just be a risk not worth taking depending on the city you live in (or at least, a house as “an investment” might be be the best reason for the purchase).

You think you found a 2-3 year place to flip (but forgot to prepare for the costs).

#Renovations suddenly became one of the most commonly used hashtags during covid. Assuming you’re no longer staving boredom at home with home improvement projects, many people who buy houses for a short term ‘flip’ may underestimate the time (and money) owning a home takes. A poll of 63% of millennaial first time home buyers said they regretted it because of underestimating hidden costs and the time/effort it takes to maintain the house. 

Many first time home buyers make the mistake of comparing their rent payment to the mortgage payment, without including other expenses that need to be budgeted for.

Closing costs can easily add 2-4% in expenses to get a mortgage across a line (which adds up in a world where the average first time buyer is only putting down a 8% down payment (taking the total ‘expense’ up to 10-12% potentially). And that’s before you pay the mortgage insurance, home owner’s insurance, property tax, and the laundry list of maintenance expenses that could be necessary at any point. 77% of homeowners have unexpected repairs within the first year of buying a house… 67%+ paid over $1k for those unexpected repairs (cnbc). 

Where you’d like to live, isn’t rapidly urbanizing

Sometimes, the things that make a neighborhood liveable or lovable, aren’t the same things that increase the value of the neighborhood over time. Perhaps you love the owner-led coffee shops, book shops, or bakeries that are on your block. Or maybe you love the diversity of individuals of all walks of life, career paths and income levels on your street. In many cities, there’s a good chance that can all co-exist because people  have alreay been there for a number of years and there’s rent protection. 

For people or businesses looking to move into that neighborhood though, that decreases the probability that someone’s going to move out. It also decreases the probability that someone already there will invest in a putting in a new storefront or upgrading their kitchen. If you’re a renter, these are all factors that are probably not important to you. But if you’re an owner in the area, new developement will help increase the value of your home.

You’re rent controlled

I once lived in a rent controlled apartment with 3 roommates in San Francisco (and a glamorous, 1 bathroom). Our upstairs neighbors were this sweet family who had lived there for 20 years. J had lived there and began dating A, then A moved in with J and his roommate, then their roommate moved out and they had some very charming kids in the apartment. And their place was ~20% what we paid. 

I had another couple live in a rent-controlled apartment. They really wanted to to own a house and finally bought a place. All in, their housing expenses ballooned to 4x what their rent controlled place used to. They had thought it was a good investment but bought at the peak of the covid boom. The other week, we had a candid conversation where they shared how stressful it was because that was probably the money they would have put towards their kid’s college funds.

You have access to better investments

There’s a huge UNLESS to the statement that for everyday families, a house is the best investment you can make. Unless you have access to better investments. This premise is near and dear to my heart, and a big reason why we decided to start Plenty. 

There’s the advice the financial planning industry gives to the everyday household around home ownerships and stock bond portfolios. Then there’s the very different advice the wealth management industry gives to wealth households. And it’s always been fascinating to peel back the layers to see where they’re starkly different. 

For high net worth families, it’s not uncommon to have ~50% of your investments in “alternative investments”. Alternative investments are different from stocks or bonds. They can include a variety of investments like hedge funds, private equity funds, private debt, venture capital, and more. The reason why these investments are so popular, is that the top funds can earn as much as 25%+ annually. That means you’d double your money in 3 years vs. 7 years in a stock portfolio earning 10% annually. 

Access to investing in a portfolio, which the invention of ETFs back in the 1970s provided, was the first major step towards bringing access to investing products of the wealthy to the everyday household. But by and large, things stalled out from there. 

In the past 5 years, the curtain’s been increasingly pulled back on this reality that it’s easy to build wealth when you’re wealthy because of access. More companies are looking to bring access to better products, for a customer base that increasingly knows to ask for better (even if they’re not quite sure what to sak for). And if you have access to these investments, it probably means your options are different than in the era where houses were the primary option on the table.

You or your family needs flexibility

Buying a house starts with a big investment of cash, and locks you in to an ongoing stream of payments you need to make. For many people, it can lock you into a job or career that you may find you no longer want.

“I don’t love my job, but I earn enough and I have a mortgage.”

When you have this obligation locked in, it can be harder to find the flexibility to go take other risks like starting a company, supporting your partner in going back to school, or going for an extended trip. While there are always paths to sublet your home or to Airbnb it, people often feel less willing to do that than when they’re renting.

You don’t plan to sell

The nature of investments are that you buy them…  then when the value has gone up, you eventually sell them. If you’ve found your forever home, that’s great! But it’s likely not an “investment” that’s going to create a cashflow for you to live off of in retirement.

Not everything in life needs to be an investment

When Channing and I make financial decisions, we don’t believe in trying to optimize every last dollar to be “the best investment” in our personal lives. But we do believe in the importance of being honest with ourselves and each other, when a decision is for “an investment” vs. a “quality of life” decision. We’re not ready to own a house right now, but we plan to one day. And when we do, it’ll likely be because we’re ready to spend the time to fully customize a space that’s ours and for the feeling of long term stability. 

Sources

“Global Financial Stability Report.” International Monetary Fund. https://www.imf.org/en/Publications/GFSR

Wang, Jim, “ Is Buying A Home Really A Good Investment?.” Forbes. June 21, 2023. https://www.forbes.com/sites/jimwang/2023/06/21/is-buying-a-home-really-a-good-investment/?sh=77fe98674aab

 O’Brien, Sarah, “ 77% of homebuyers face unexpected repair costs in first year of ownership, survey finds. Here’s how to head off surprise expenses.” CNBC. February 22, 2022. https://www.cnbc.com/2022/02/22/3-in-4-homebuyers-face-unexpected-maintenance-costs-in-first-year.html

Asperin, Alexa Mae, “This is the average age of first-time homeowners in California.” Fox 11 Los Angeles. January 3, 2024 https://www.foxla.com/news/california-first-time-homeowners-average-age

Leonhardt, Megan, “63% of millennials who bought homes have regrets—usually because they missed this one crucial step.” CNBC. March 1, 2029.  https://www.cnbc.com/2019/02/28/63-percent-of-millennial-homebuyers-have-regrets-heres-why.html

Holzhauer, Brett, “Here’s the average net worth of homeowners and renters.” CNBC. April 5, 2024. https://www.cnbc.com/select/average-net-worth-homeowners-renters/

Goff, Kacie, “What is the average down payment for first-time homebuyers?.” Mortgages. February 23, 2024.  https://www.bankrate.com/mortgages/down-payment-for-first-time-homebuyers/

Chisholm, Kirk, “Top 10 Ways That Wealthy Families Protect and Grow Their Wealth.” Innovative Wealth.  https://innovativewealth.com/alternative-investment/top-10-ways-that-wealthy-families-protect-and-grow-their-wealth/

Fuller, Michelle, “Private wealth is heading to alternatives—what’s driving it and where is it going?.” John Hancock Investment Management. May 11, 2023. https://www.jhinvestments.com/viewpoints/alternatives/private-wealth-is-heading-to-alternatives-what-s-driving-it-and-

Peters, Damien, “Your Home is not an Investment, Sorry.” Wealth Noir. November 11, 2020 https://wealthnoir.com/blog/homes-investments/