For most Americans, owning a home is the single biggest purchase and the single biggest investment in their lives. That first fact is perhaps unsurprising, but the second is truly a concern.
That’s because housing is not really an investment. Yes, it has tended over the long term to appreciate ahead of inflation. But there are other factors at play here: Interest rates, for instance, can substantially affect your total cost of buying a home.
But let’s assume you buy well at a reasonable interest cost and live in your home for decades. You maintain the home and the neighborhood stays charming, the schools good and the commute to jobs reasonable. There is a market for new buyers as you near retirement.
Safe but slow
All is well, right? Not so much. See, housing only puts on about half a percent over inflation over the very long term, measuring from 1890 through 2008. Leaving aside for a moment the housing bubble and bust, consider what that means: Housing is a protector of value, perhaps, but not a powerful grower of value.
If you were set on making investments today for your long-term financial picture, would you buy a certificate of deposit paying half of 1 percent over inflation for 30 years? Inflation from 1914 to date was 3.33%. Add housing gains to that and you’re earning 3.83%.
That’s in the same ballpark today as a 30-year Treasury bond. A home is perhaps a more comforting investment for many. You get a tax break on interest and taxes paid. You get to live in the house, of course, which saves you paying rent to someone else.
I’m not against housing at all, if it’s put in the proper context. So let’s stack that up against investing in the markets for the long term. From 1871 through 2013, adjusted for inflation, the S&P 500 returned 6.86% compounded annual growth. (Leave inflation out and the number is the more commonly cited 9% return.)
Double your money
Now let’s bring that down to your real goal — retiring on time. Using the Rule of 72, we can easily figure out how long it takes our money to double, the target of any long-term investor. At 3.83%, a house valued at $150,000 takes nearly 19 years to become worth $300,000.
If you put that money into a long-term investment portfolio that keeps up with the S&P 500, your investment doubles to $300,000 in 10.5 years.
Here’s the crucial point: Wait another 10.5 years and your portfolio doubles again, to $600,000, even though haven’t added a penny to it.
Ten more years and you’re at $1.2 million and, hopefully, retired. So yes, buy a home. But don’t let making a mortgage be the reason you fail to save and invest for retirement as well.