The American dream is a goal we’ve all heard of at some point in our lives. This dream involves raising a family, building a successful career, and (most importantly some would have us believe) owning a home. Everybody dreams about owning a home and it’s marketed as the biggest asset in life.
But is owning a home really the biggest asset in life? You start paying the mortgage and equity begins to build, but you have to remember that the typical mortgage spans 30 years. Who really stays in their homes long enough to reach that 30-year mark to have their house become a full asset nowadays? With house maintenance and the fluctuating value of the housing market coupled with how long someone stays in their home, a house can actually be a liability on the balance sheet and an expense on the income statement.
Think about it. The upkeep of a house is a constant. A good rule of thumb is to estimate maintenance at roughly 1% of the value of a home each year. Until the house is paid off, you have this huge debt called a mortgage along with sunken costs of maintaining a functioning home such as water heater replacement or kitchen appliance replacement. That’s money down the drain to increase the value of the home minimally if not downright just maintaining the value of your home.
Plus, gone are the days when everybody just buys a home they live in forever. A buyer of a single-family home tends to stay in that particular home for about 13 years in this day and age. And that’s just the national average. Where I am, you are talking roughly five to six years. That’s it. Of course, you’re building equity in your home in the meantime, but by the time interest is paid on the loan, the equity being put into the home is hindered. Plus, you have to pay a substantial commission fee to a realtor to market and sell the house when you want to move. Yes, Redfin and the like have reduced commissions by quite a bit, but you are still talking about 3% – 5% gone right there.
Lastly, the natural fluctuation of the housing market may affect the value of your home. The financial crisis in 2008 may seem like a distant past now, but it was a painful reminder of how the housing market can become over inflated. We’ve had a huge run-up during the pandemic and now with mortgage rates essentially tripling in under a year and affordability collapsing, owning a home isn’t guaranteed to increase your wealth in the next few years at the very least. Plus, there is always real risk in owning a home such as natural disasters wiping everything out. A multi-million dollar home close to our close burned down due to the electrical grid in the area catching fire recently. It happened so suddenly that the firefighters just didn’t have enough time to react. In just a span of a few hours, the whole house was turned to dust. Things happen and it’s sometimes completely out of your control. I hope the homeowner has home insurance so the family can at least recoup some of the cost.
What’s even more freaky is that the house that got burned down was the only one that suffered major damage. Every other house in the neighborhood was completely fine. They did have to deal with lowering estimated property values though. After all, everyone’s talking about that area now and who would want to pay millions to buy a home that can vanish right in front of our eyes?
It’s Not All Bad Though
Of course, many people own a home and end up making it work in their favor even though a house is a big pile of debt.
For one, and perhaps most importantly, the mortgage acts as forced savings for people who own a home. They may not get a great return on the asset, but most people are diligent about paying their monthly mortgage bill and thus continue to build that equity through the years of ownership.
Secondly, real estate has been a long term appreciating asset in pretty much all of the developed world. Hold the asset long enough, don’t keep using the equity like an ATM machine by serially making cash out refinances, and everybody will have positive equity eventually.
The idea of telling someone their house is more of a liability instead of an asset is thought provoking. There will always be pushback and reasons why that statement is invalid, but it is a conversation that needs to be had because assumptions can often lead to ruin. Too many people rush into home ownership without weighing all the pros and cons in search of the American dream. Maintaining a home, fighting potentially lowering property values, and moving costs are all reasons a house is in fact a debt and not an investment.
Owning a home can be a great decision, but it doesn’t work for everybody. Don’t automatically assume you are doing yourself a favor by stretching yourself financially to squeeze into that dream home. It could be the disaster you couldn’t afford.
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They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it’s free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.