Many people decide to buy a home, or spend too much on a home, because they think it's a smart investment. The reality is that home values appreciate rather slowly relative to many other asset classes. In this clip, Michael Douglass and Matt Frankel discuss the good reasons for buying a home, but "because it's a good investment" isn't one of them.
A full transcript follows the video.
This video was recorded on Nov. 27, 2017.
Michael Douglass: Myth No. 1: Buying a home is always a good investment.
Matt Frankel: Yeah, any time you hear the word "always" in a financial statement, odds are it's somewhat of a myth. It's important to know the difference between investing in real estate and buying a home. If you buy an investment property where someone else is paying you rent, you're using that to pay down the mortgage, pay the bills, you're not paying anything out of pocket to own it, that's an investment and it can actually be a pretty lucrative one over time. On the other hand, buying a house -- it's a home. In a lot of cases, it's more expensive to buy than to rent. It's not true by me. I know in a lot of metropolitan areas, I think at Fool HQ, it's a high-cost market, so it's a little expensive to buy. Anyway, homes have historically appreciated by about 3% annually over time. This is not a great investment return. Stocks generall, over long periods of time return 9% to 10%. Bonds are in the 4% to 5% range, historically, over long periods of time. So it's kind of a fallacy that it's a great investment. There's the argument that you're building up equity as you pay down the mortgage, which is somewhat true if you're not paying that much more to own the house than you would to rent a comfortable home. If you are, you're far better off investing the difference.
Having said that, there are other reasons to buy than just financial. For example, in the neighborhood I live in, there are simply no homes available for rent. So there are very good reasons to buy. Michael and I both are homeowners. We should say that in full disclosure. But, for an investment is not one of those reasons.
Douglass: Yeah. I think this is one of the key mistakes that a lot of people make when they're thinking about home buying -- they assume that it is financially better, always, than renting. The fact of the matter is, owning your own home comes with a lot of benefits that aren't financial, potentially. There's something nice about being able to paint things any color you want indoors. There are benefits to knowing that you're not going to get kicked out next year because the landlord decided they were going to sell the property that you were renting. There's the benefit of knowing that your costs are generally going to be about the same year to year. Of course, real estate taxes change, there are other things that change, too, but generally speaking, your mortgage is pretty much going to be the same as long as you're on a fixed rate mortgage.
But, the fact of the matter is that most of those reasons aren't really explicitly financial. It was interesting, actually: When Haley and I were -- Haley is my wife, by the way -- talking to realtors about buying our first house, we received some literature. There was this one piece of paper that said, "five great financial reasons to buy a home." And three of them weren't financial at all. And I was just flabbergasted, because I just thought, come on, let's just be honest and up front about the fact that there are nonfinancial reasons to buy a home, and that's totally fine.
Frankel: Yeah, definitely. My wife and I have two dogs, which severely limits your options for renting, which anybody who's trying to rent -- especially with a pit bull like we had when we bought our house -- anyone who's tried to rent a place with a pit bull can tell you it's not easy. So, things like that definitely make buying a preferable option in many cases. We have children, we want them to grow up in the same place without fear of having to move every year if the landlord sells our house. So, things like that are reasons to buy. I don't recommend spending more than your maximum budget because you think it's a good investment. That's where this breaks down, too. A lot of people buy as much house as they can possibly afford because they think that's the best way to invest, which isn't true. You're better off buying what you need and investing your extra money either in stocks or bonds or mutual funds, or something like that.