I am a big believer that people should treat their houses as homes, not investments. An easy trap that home-buyers can easily fall into is the false hope that a home purchase will become a source of riches for years to come. Another disappointing decision-trap that diminishes the long-term wealth of home-buyers is when they decide to use their home as a piggy bank, draining the equity from their home to meet their financial needs today.
First of all, home price appreciation generally corresponds with the inflation rate. Since the early 1970s, home prices have gone up, on average, just shy of 4% per year. Meanwhile, since 1970, the rate of inflation in the United States has been about 3.1-3.4%, depending on where you live. When you factor in property taxes, home upkeep, and financing costs, you will be fortunate to find yourself breaking even on the purchase of your home over the long-term. Especially considering the fact that American large-cap stocks have returned about 10% per year since 1970, it seems incredibly self-evident that high-quality stocks should be the place to park your investment capital, not homes.
To be fair, there is one advantage with homes that you won’t find with stocks—they’re much more tangible. If you a company’s stock, there is always the small, outside chance that management is faking earnings and cooking the books. Generally speaking, you can’t fake the existence of a house. There is very little chance that your home will lose 70-80% of its value, and an almost 0% chance that your home will ever be worth $0. Of course, the same thing can’t be said for stocks. However, if you get in the habit of buying a dozen or so firms with strong earnings potential and hold them for the long haul, you will do phenomenally better than if you consider your home purchase to be an investment.
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