Your Home as an Investment
It has been fairly well established over the last 100 years in North America that residential real estate is a reasonably safe investment. In the long term, residential home values have always increased, generally outpacing inflation and bringing a decent return on investment.
So, a home buyer should look at their home as a good, solid investment vehicle, right?
In our view, absolutely not. We believe that a home buyer should look at their home as exactly what it is–a place in which they can live. Yes, a home can viewed as an enforced savings account, generally increasing in value while you enjoy its benefits. A home should not, however, be viewed as the next big investment vehicle. A 3 bedroom ranch home should not be viewed as a great substitute for 3Com or Amazon stock. We are absolutely amazed by some of the comments we have heard from home buyers–and touted by the media–about the “wonders of real estate investment.”
“Real Estate values never go down.”
Wrong. The trend, taking a 15 to 20 year window, is up, yes. But there are plenty of instances where during 5 to 10 year periods prices did not go up or, worse, declined.
“Lost money in the stock market? Putting what you have left in real estate is the smart move!”
Not if you are buying at the peak of the market and overpaying for your purchase. Remember all of the “experts” who said Yahoo! stock was a great buy at $200 a share? (Currently about $10). That Priceline was a “can’t miss” at $120 per share (now $1.50) when analysts shouted “buy!” Now the experts are telling your that real estate is a sure bet. Take it with a grain of salt and a sense of history.
“Even though I don’t really need it, I can buy this home for $275,000 now and sell it for $350,000 in a couple of years. A guy at work just did it.”
This is the same “greater fool” theory that helped to bring down other investment classes–the notion that it was okay to overpay for a commodity because there would always be a “greater fool” that would pay more for it. Until the market softens and the fools disappear and values stop rising without fundamental reason.
To sum up, if you look at your home as a place to be enjoyed and cherished, as a home, you should be pleased that you’ve gained some appreciation while you were living there. But if you look as your home as a “cash cow” you will very likely be disappointed.