How does home ownership affect one's future purchasing power?

[sethmachine]

I've come across many philosophies that have run the gamut that home ownership is a speculative, an investment, an insurance, a cost, or just a roof over your head (or any combination of these ideas and many others I haven't mentioned).

The situation I'm describing: suppose one spends a significant net worth to make a downpayment and service a mortgage. In the best case scenario, the home appreciates faster than inflation/U.S. stock market, which over time could give you significant equity gains realized when selling or taking out an equity loan. However, if your home does well in price appreciation, it should almost always mean the surrounding homes have appreciated comparably. So if you go to sell, realize your gains, you'll find yourself in the same dillemma: having to fork over another significant portion of your net worth (or even more) to get the same type of home. If you want to get a better "home" (location, size, etc.), you'll need to fork over even more cash.

If this is true, it appears you don't really gain future purchasing power if you buy a home and wish to upgrade to another home in your area. You could only realize a gain in future purchasing power if you sold your appreciated home and relocated to an area which did not appreciate as rapidly.

To me it seems home appreciation is a catch-22 if you desire to continue to live in your general city forever. Your home value goes up but so do surrounding homes, so you're really no better off in terms of future purchasing power. To realize a gain in purchasing power, you would need to relocate to a real estate market that did not appreciate as fast as your area.

Now I'd love to hear why I'm wrong or what's incorrect about my analysis. A made up example to illustrate my point: If I buy a $1 million condo in NYC, how will this help me in the future move up to a Brownstone as opposed to investing in stocks to eventually just afford the downpayment and future mortgage for that Brownstone (supposing I'm a young 20s person so I have maybe a 15 year time horizon before I need the Brownstone to raise a family, etc.). As long as the stock market outpaces NYC real estate, I should come out ahead (with an additional risk of uncertainty if there's a bear market and it delays or reduces my purchasing power).

[kork13]

You're right -- in most areas, real estate appreciation tends to merely keep pace with inflation, serving as a store of wealth. It goes up in value, but generally only grows within 1-2% of the local area's inflation. It also only rarely goes down notably in value, so owning the home protects the value of your investment in the home. But you're forgetting something... It's also a home, a place to live. If you didn't own the home, you'd be paying rent year in & year out. Add that value to the home, and you're coming out soundly ahead of basic inflation, and far more reliably than stocks.

To give you specific numbers:
When I was 26 (2012), I bought a new 3bd/2ba house for $177k. I used most of my non-retirement money ($45k) as a down payment. At the time, my total net worth was around $150k, so this house amounted to a huge amount of my assets. During the 4yrs I lived in the home, it appreciated by ~$12k, 2.5% annually (which is typical for the area, Oklahoma City). However, while I lived in the home, it saved me from having to pay rent that I would never see again (about $1200/mo for comparable at the time, $58k over 4yrs). Yeah, I had to pay my mortgage, but over half of that went back to me as equity (~$35k). So off of my $45k DP, I got a combined benefit of $47k across 4 years -- how does a quick 20% annual ROI sound to you?

We have since kept the house as a rental, paid it off, and it's earning us a respectable profit. I'll spare you the math, but the short story is that we're earning roughly 7-8% annual ROI ... sustained, consistent, and reliable. That's nothing incredible, but with very low chance of going down in value, we have a risk & volatility profile closer to a bond. So from a risk-adjusted standpoint, that's a pretty good long-term, sustained return.

I could make more by investing it in the stock market. But that's an apples & oranges comparison. Real estate is more stable & reliable than stocks.

[bjl584]

A house is probably a liability at the end of the day. You'll make money when you sell, most likely, but after you add up the mortgage payment, taxes, insurance, and maintenance and upkeep, you probably aren't going to be too far ahead versus investing somewhere else unless you were lucky enough to time the market when housing values went crazy 2020/2021.
But, I'd rather have my home than rent. I'm working on some remodeling projects that wouldn't be possible if I were a renter. I'm close to work and family, and my place is affordable.
My house has value but it's more about having a safe, comfortable place to call my own.
One day I'll probably sell. I will most likely walk away with some money in my pocket, but my focus on investing is in the markets.

[Fishindude77]

A house is probably a liability at the end of the day. You'll make money when you sell, most likely, but after you add up the mortgage payment, taxes, insurance, and maintenance and upkeep, you probably aren't going to be too far ahead versus investing somewhere else unless you were lucky enough to time the market when housing values went crazy 2020/2021.
But, I'd rather have my home than rent. I'm working on some remodeling projects that wouldn't be possible if I were a renter. I'm close to work and family, and my place is affordable.
My house has value but it's more about having a safe, comfortable place to call my own.

Agreed.
The home makes up a substantial portion of most folks net worth, but it's not really any kind of wealth you can use or spend until you sell, and then your stuck needing someplace else to live.
The only way you can really get ahead like this is if you have a high paying career in a HCOLA that pays for a home there, then come retirement time relocate to LCOLA to appreciate the windfall.

[disneysteve]

I don't think your primary residence counts as an investment. I define an investment as something you put money into in order to make more money, and a house doesn't meet that criteria. As bjl584 said, a house is probably a liability, an expense, in the grand scheme of things.

I never count the value of our home in any financial calculations, retirement planning, etc. It's dead money. If we sell it, we just need to take that money and use it to buy the next one.

[disneysteve]

The home makes up a substantial portion of most folks net worth

I wonder what the median is for that. What percentage of net worth is typically made up of one's home?

For us, it's about 8-9% of our net worth, not all that substantial.

[ua_guy]

In the right areas it's not uncommon to see half-million dollar increases in equity in <5 years. For that reason, a primary property may be considered an investment. We've done well in our own property and wonder if now is a good time to cash out, again. But like the OP outlined, where would we go?

[bjl584]

I wonder what the median is for that. What percentage of net worth is typically made up of one's home?

For us, it's about 8-9% of our net worth, not all that substantial.

My primary residence is about 20% of my overall portfolio and falling fast.
I'd expect it to be under 10% like you before too long.

[Fishindude77]

I wonder what the median is for that. What percentage of net worth is typically made up of one's home?
For us, it's about 8-9% of our net worth, not all that substantial.

I'd guess that the value of the home is 50% or more of the net worth of most Americans approaching or at retirement age.
Most just don't have much saved, they're counting on SS or a pension to live on.

This is a unique group here

[disneysteve]

I'd guess that the value of the home is 50% or more of the net worth of most Americans approaching or at retirement age.
Most just don't have much saved, they're counting on SS or a pension to live on.

A pension definitely changes things. Lots of retirees have a pension and SS that fully covers their expenses and more. Any savings is just excess.

[Fishindude77]

A pension definitely changes things. Lots of retirees have a pension and SS that fully covers their expenses and more. Any savings is just excess.

Yeah, I've got a friend like this. Knew he was going to get a pension and SS and basically never saved any significant money.
Still owes on the mortgage and makes car payments in retirement but isn't concerned because SS and pension cover the bills.
Decent pensions are becoming more rare as time goes on.

[disneysteve]

Yeah, I've got a friend like this. Knew he was going to get a pension and SS and basically never saved any significant money.
Still owes on the mortgage and makes car payments in retirement but isn't concerned because SS and pension cover the bills.

Can’t argue with that. Why sock away money for decades that you’re never going to need?

Of course I’ve spent my career planning for retirement not counting on SS just in case. Now I’m pushing 60 and SS is clearly still here so we should be in great shape.

[scfr]

For the OP, I think there are a couple questions to ask yourself:

- Will you have the discipline to live on as tight of a budget and save as aggressively if you continue to rent as you would if you were in that final push of saving for a down payment or paying off the mortgage?
- Is investing 100% in the stock market really your best choice to get you to that large down payment on your dream home? As you said, a bear market could delay or kill that dream. Is there a more conservative mix that could reduce that risk while still helping you reach your goal?

Numbers are important. So is self-awareness.

My personal home ownership philosophy is that my home is shelter from the storm, a refuge from the world, a responsibility (yep it needs to be maintained and that takes time & effort), and an experience (our current home has a few luxurious touches and in a nice enough location that make it a real joy for us and house guests to live/stay in). And while it isn't a financial asset/investment per se, we absolutely consider the investment component when purchasing a home (it's resale potential), and I can't fathom doing otherwise.

[LivingAlmostLarge]

Real estate is really local. We've come out far ahead by buying but we've been in the coastal areas our entire lives. So YMMV. We've moved also and cashed in and moved up and into bigger places. Basically by buying we've always come out ahead of a renter in our area. People say renting in HCOLA comes out. I say the opposite. When you are in an expensive area, the cost of renting eats into your ability to save for a down payment. So you never catch up. And rent doesn't go down.

Ask me how perpetual renters are never able to get into the market and then they are almost 50 and it's gone. Had they bought something 10 - 15 years ago they'd have come out ahead. Of course if they were renters who saved the difference between rent and the mortgage payement PITI maybe they'd be on par, but otherwise there is no catching up.

There is no way to catch up on principal savings/repayment. There is no way to catch up on appreciation. We 10x our initial down payment in 3 years. We then took our equity and flipped it into another property that we ended up 3x the equity but that took 10 years. Now we've 3x the equity we put down on our place in 7 years. Of course we also almost 1x or matched our down payment in principal paydown in 7 years as well so we are doing very well with our home.

What percentage of our NW? about 30% I would say is in home equity.

[kubet6886]

Homeownership preserves wealth through equity, acting as a form of forced savings. While home appreciation may not increase purchasing power if you stay in the same area, relocating to a less expensive market can unlock equity gains. Stocks generally offer higher returns but come with more volatility. Ultimately, homeownership provides stability, while stocks offer potential for greater future purchasing power, depending on your risk tolerance and goals.