Please note that this was written by me in June and I am just transferring it to this blog.

Ok. some folks know already, my company is moving in a few months and I probably am as well.  I keep hearing all about buying houses and how great it is and whatnot, so I wanted to go ahead and put up a little rant about my stance on the subject.

Let's clear up a couple myths:
1. Houses are great investments
2. Houses are great long-term investments
3. The market might stagnate, but your house will never lose value.

Ok, we'll get to an excercise here in a bit, but first a little talk about numero uno.  Houses are not great investments, they aren't even good investments and they are mediocre (at best) as hedge investments.  There is no blanket rule that makes them a sure-fire win great investment.  A house can be a great investment, yes, but it's about as common as a car being a great investment.  If you still don't believe me, ask yourself this question: What other investment vehicle requires you to borrow many times as much money as you earn and pay interest on that borrowed money for up to 40 years?

Now, the next thing you will hear is that houses are only great long-term investments.  In the short-term you will only pay on interest and gain no equity.  Living in a house for 5, 10, 20 years, etc makes it a great investment.  This is a lie.  In all reality, the best way to make houses true investments is to buy for the short-term.  You see, when you mortgage a house you are leveraging your assets, generally 10-1 or more.  Consider the market, nationally houses gain about 6% value yearly, if you were to buy a house for $100,000, that means it would be worth $106,000 in one year.  If you were to put 10% down and sell it in one year, you would make about 60% on your initial investment and would have essentially paid rent for a year.  The longer you stay in the house, the more you equalize your position and reduce your rate of return.  The best way to make a house a good investment vehicle is to buy under value and sell at an inflated value or to buy low, add value (home repairs, additions, landscaping, pool) and sell high.  Either way, the best way to turn this into a worthwhile 'investment' is to flip it, not buy and hold as if it were a blue-chip.

Lastly, houses lose value.  Property gains value, houses can have value added to them, but if they are just simply used, they will lose value.  If you buy into a subdivision, you will see lesser and lesser returns as it gets older and, given enough time, value will drop in the area.  If you sink additional money into your house yearly (which most do) you will slow this, but it is near impossible to stop.

Now that everyone is sufficiently disappointed, let's talk about some good things.  Home ownership is not a 'good' investment, but it's a much better one than rent in many cases.  Over the years, your mortgage will probably be outpaced by rent prices and you will have a lower cost of living than renters.  You will also get some of your money back when you move, something that is very hard to do if you rent.  Houses help your credit, give you some reserve of money if you absolutely need it and provide you a very modest return.  No other consumer product that I know of will let you use it and give you more money than you put in.  It's not a bad product, just a poor investment.  The fact is, you have to live somewhere, so buying is a much better financial decision than renting in many areas.

Now, for those who don't belive houses are bad investments, here's a little excercise I did...

Let's assume that a young person like me has $15000 (10%) to put down on a $150,000 house.  Let's also assume that my great credit allows me to get a good 6% mortgage rate.  Assuming that I only put $1200 extra into my home every year for upkeep (bathroom maintenence, flooring, paint, windows, heating/cooling, etc.), my mortgage payment would be about $921, this includes my county taxes in Wilmington and my PMI insurance becuase I put less than 20% down.  We need to add in my $1200 yearly for repairs, which is probably a bit low, so my cash outlay for the year is $12,252.  

Now, assuming my house gains 6% value yearly, at the end of a 30 year mortgage my home will be worth a grand total of $861,523, an impressive sum, but wait... I paid that $150,000 for the house, plus I paid $156,384 in interest and another $36,000 in repairs.  So, once I subtract my additional 'investments', I have a total net gain of $519,139.  So, in a 30 year period, I didn't even manage to double the money I put in.  Just so everyone knows, our money should have doubled twice at 6% over 30 years.  Now, let's look at some investment vehicles and see how they compare if I invest the same money:

House Value: $861,523
Money Market Account Value: $877,313
Bond Fund Value: $1,044,459
Agressive Mutual Fund Value: $5,650,324

Our home 'investment' didn't even beat a money market account from CapitolOne.  Money market accounts are not considered investments or, generally, even considered hedges.  The are used as a way to keep our capital liquid and still get a return on it.  By the way, your money is far from liquid if you own a house.  Next on the list was a super-conservative municiple bond fund.  This beat our 30 year investment by almost $200,000.  If this were a corporate bond fund or a higher-end muni fund we could have had double the worth of our house.  Lastly, I used the Ariel fund, a proven performer, to show what a real investment would yield.  This was 6.5 times the yield of our house.  

The downside to this great investment, of course, is that I can't live in it and it won't give me showers and entertainment.  Houses are incredible things and great consumer products, but they are terrible investment vehicles.  They make poor hedges becuase they are not liquid enough and too volitile.  People invest in low return vehicles for stability, not long term returns.

Just in case you're curious:
Money Market: CapitalOne High Yield Moeny Market - 4.75% APY.
Bond Fund: Evergreen High-Income Muni - 5.67% incepted average.  EFHYX
Agressive Fund: Ariel Investments Ariel Fund - 13.92% incepted average.  ARGFX

I used calulators at moneychimp.com to make this possible.

I want to thank Ben Stein for first showing me the truth about home ownership.