Housing Costs Are at an All-Time High. Is Buying a Good Investment?

Monthly mortgage payments are at an all-time high, according to Redfin. Its latest data showed the median monthly mortgage payment reached $2,666 in the four weeks ending Sept. 24. The combination of high property prices and sky-high mortgage rates mean homeownership is more expensive than ever.

It got me thinking. The conventional wisdom is that owning a home is an important financial goal. But, putting aside the emotional aspect of owning your own home, is it actually a good investment? When I crunched the numbers (admittedly in a very back-of-the-envelope fashion), buying property did not seem so attractive.

Is buying a home a good investment?

There are many arguments for buying a home -- chief amongst them, the idea that you'll always have a roof over your head. Another is that you won't be "throwing money away" on rent. Plus, you have control over your space, so you can house your pet elephant and paint the walls in psychedelic colors if that's what takes your fancy.

Those things are all great. But that doesn't necessarily make your home a good investment. An investment is an asset you buy so that it can appreciate in value and build wealth over time. Investments might take the form of property, stocks, bonds, or other assets that you hope will accumulate value. It's also worth noting that investing carries risk -- property prices sometimes fall, and the stock market can have bad years.

Crunching the numbers

Let's say you have $100,000 saved up. You could use that as a down payment on a $400,000 property with a 30-year mortgage at 7.5%. Alternatively, you could invest the $100,000 in the stock market and add the money you're saving each month by not owning a home.

Here's a very simplified breakdown of what the monthly costs and overall profit might be in those two scenarios:

Now, this is all very hypothetical. It doesn't include inflation, nor does it factor in the increase in rental costs. All the same, owning a home will often cost a lot more than renting. As a homeowner, you are responsible for fixing things when they break, paying for homeowners insurance, and more. A lot of the money you save in rent will go to your mortgage company in the form of interest. And if you fall behind on your mortgage payments, you could lose your home.

Here's how I got the figures above, most of which are based on national averages.

Buying a property:

• Mortgage and taxes: According to our mortgage calculator, your monthly payment on a $400,000 property with a 7.5% mortgage rate and a $100,000 down payment would be $2,731. That includes your principal and interest, insurance, tax, and HOA dues
• Maintenance: Thumbtack estimates essential home maintenance sets the average homeowner back $6,413 a year, which is around $535 a month.
• Property appreciation rate: The Federal Housing Finance Agency (FHFA) has been tracking housing prices since the mid-1970s. According to its data, the compound annual growth rate on houses since 1991 is 4.4%.

Renting and investing in the stock market:

• Rent: According to Redfin, the median asking rent this August was $2,052.
• Renters insurance: Insurance.com says renters insurance will cost around $347 a year, or $28.92 per month.
• Rate of return: The S&P 500 is a good benchmark for stock market investments. It has generated average returns of almost 10% over the past 30 years. The power of compound interest and a consistent $1,185 monthly investment can really add up.

What all this means for you

Buying a home is not as simple as switching your rent for a mortgage payment. There are a lot of hidden costs and responsibilities involved. Here are some concrete steps to take, whichever camp you are in.

If you think you'll never be able to buy a home

The good news is that there are other -- arguably better -- ways you can build wealth over time. Renting may not be the American dream, but it has its advantages. These include having fewer maintenance responsibilities, more flexibility, and potentially more disposable income. But you need to be disciplined. Once you've built an emergency fund, make sure you invest the money you would otherwise spend on a mortgage.

If you don't have a brokerage account, open one. It can be intimidating at first, but bear in mind that you don't have to be Warren Buffett to build wealth. Rather than picking individual stocks, which can take a lot of time and research, you might opt to buy index funds or exchange-traded funds (ETFs). These can give you exposure to a mix of stocks. Learn more about how to get started with investing.

You can also invest in property without buying your own home. One way to do that is to buy real estate investment trusts (REITs), which are essentially entities that hold different types of real estate. You can buy REITs from your stock broker, but you'll need to do some research to decide which REIT you want to buy.

If you are determined to buy a home

For many Americans, home ownership is more than an investment, and you may not want to give up on that dream. After all, where else are you going to put your pet elephant? There are several ways you can still get on the property ladder. It may mean making some sacrifices to both build up your savings in the short term and cover homeownership costs over the years.

Research down payment assistance programs or other schemes that aim to help first time buyers. For example, FHA loans are backed by the government and can be easier to qualify for. There are several different options, and a good first step is to see what's on offer. Most of all, understand the considerable costs involved in buying and owning a home. It can be a good investment, but it can also be a huge financial burden. Make sure you're ready.