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Investment vs. consumption
To understand the investment value or lack thereof for a home, it is
necessary to differentiate between an appreciable and depreciable asset.
An appreciable asset increases in value over time and a depreciable
asset declines in value. The house you own and live in depreciates over
time unless you maintain it. The annual expenses for maintaining a home
ranges from 5 to 10 percent of the value. Real estate taxes are 2-3
percent, insurance can be 1 percent, utilities and heat can be 2
percent, annual maintenance such as painting, plumbing, gardening and
recurring repairs can be anywhere from 2 to 5 percent. If the cost of
maintaining your home is 10 percent yearly, the increase in value
annually must exceed 10 percent per annum in order for it to qualify as
an appreciable asset. This level of appreciation has rarely been seen in
the past and is not expected in our future. Therefore, a home is really
a consumption item.
If you purchase a home for $300,000, you must spend approximately $30,000 yearly to maintain it. If you were to invest the $300,000 in the stock market over time you would receive an annual rate of return of 7 percent, or $24,000 yearly. From this obvious scenario you would be $54,000 a year richer. You could use that $54,000 to rent a more modest home, because you must spend something for living expenses.
Because homeownership is part of the American Dream, our government has distorted the calculation of the rate of return by imposing tax incentives and subsidizing mortgages for homeownership. These tax incentives have encouraged people to buy bigger homes and have increased the price of housing over time. This government interference in the housing market has created the illusion that homes are investments. This is clearly another example of how our congressional leaders use government power to enhance their political position at the detrimental expense of the American people.
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