Is Your Home Worthless?

If you're like most Americans, a substantial portion of your money feeds the cash-hungry beast in which you live. Your home may often be called your "single biggest investment," but let's be honest -- more often than not, it's a money trap. On top of the mortgage payment, the joys of home ownership include homeowners' insurance, property taxes, maintenance costs, repair charges, pest control, and on and on and on. That's just what it costs to keep the structure sound and in your name; add in home-improvement projects and the costs keep escalating. If you're lucky, some 30 or so years down the road, you might own your home outright. While that frees you from your mortgage payment, that's the only bill that goes away once you completely own your home. To make matters worse, in 30 years your home will be a much older property, making the additional repair costs eat through much of the savings from not having to make mortgage payments to the bank.

Right now, you're probably thinking "but what about my equity?" To which my response is "what equity?" For the sake of argument, let's assume you took out a $100,000 mortgage for 30 years at 6% interest. After 81 months (6.75 years) of paying that mortgage, you'd still owe more than $90,000 -- more than 90% -- on the principal, despite having made more than $48,500 of mortgage payments for the privilege of borrowing the bank's money. Even if your home appreciates in value, the only ways to tap that equity are to take out another loan or sell your house. Take out another loan, and you're stuck paying even more interest, not to mention the mortgage-funding fees and other associated costs of getting the cash in the first place -- costs that are typically thousands of dollars. Sell your home, and you're likely to see a 6% or so haircut from realtor commissions, along with the nagging problem of needing somewhere to live.

Don't expect the unique and radical price appreciation of the past few years to continue indefinitely; there are already signs that the market is softening. In the long run, home prices simply cannot rise faster than people's ability to pay for them. Face the facts -- your home may be a wonderful place for you to live, but as an investment, it's likely no better than average.

That raises a question
Clearly, folks have been profiting from the housing boom. Among them, homebuilders. Take a look at this chart showing the price appreciation of some of their stocks over the past five years:

*Prices are split-adjusted

Most astonishing of all, even after that tremendous run-up, DR Horton still trades at a trailing P/E below 8. To put those spectacular gains into perspective, had you bought $100,000 worth of DR Horton stock five years ago, your shares would be worth more than $612,000 as of this writing, and that's before factoring in the dividends. That's right -- in stark contrast to the maintenance costs you've had to pay to own your dream home, you might even have been paid for your time had you owned a piece of the builder of that premises. If you're the proud owner of a property that has had an investment return anywhere near that level over the past five years after incorporating all expenses, drop me a line -- I'd love to hear about it.

Other folks who've profited
While not as obvious as the home builders, title insurance companies have also quietly racked up tremendous gains for investors during the housing boom. Nearly every time a mortgage closes, including refinances, a new title policy gets sold. Yet another cost for the homeowners, but a tremendous profit center for title insurance companies such as Fidelity National (NYSE:FNF) and First American (NYSE:FAF).

The connection between the housing market and the title insurers is there, but it's not instantly obvious. As a result, tremendous bargains were still available among title insurers even after the housing boom was long in the tooth. In his October 2004 issue, in fact, my friend and colleague Philip Durell selected First American for Motley Fool Inside Value, pointing out that the company happened to be trading just above its book value. Any time a profitable company approaches or dips below its book value, it's a good idea to investigate it as a possible investment. As long as a company is still expected to make money, there's usually not much more room for it to fall below that level. Up some 60% in just over a year, First American has been a stellar performer for subscribers, in spite of having been picked well after the housing boom had matured.

The Foolish bottom line
Your home is a wonderful place to live and care for your family. As an investment, it's probably not all it's cracked up to be, even if you've been blessed by the stupendous appreciation of recent years. If you're ready to get serious about investing, click here to start your 30-day free trial to Inside Value and start learning how can may profit from investments that don't need constant infusions of new cash.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned Class B shares of Lennar. The Fool has a disclosure policy.