Does the House always win?

Dan Kresh |

The truth about wealth building is that it usually happens over time. Incrementally investing in an asset that tends to appreciate for decades is a pretty solid foundation to build wealth from. This is contextually important when looking at home ownership in terms of wealth building because it tends to be easy to forget that a typical mortgage is a 30-year[i] forced savings plan.

So, when looking historically at how homes have built wealth since the end of WWII, it is important to keep a few things in mind. All the anecdotes you’ve heard about people selling houses after 40 years are about people that stayed in the same place for 40 years, not everyone who bought a house kept it and stayed there. Some of those people sold at inopportune times and lost chunks of their wealth, but those stories don’t easily come to mind[ii].  There’s a saying “time in the market beats timing the market”. Real estate, like stocks, can be quite volatile in the short term, and though past performance is not necessarily indicative of future results both have tended to reward long-term investors who are not too exposed to single points of failure.

Persistently making mortgage payments is a good financial habit, largely because of forced savings. There are certainly other potential benefits of homeownership but other risks as well. You could argue these risks have increased due to changing climate and more frequent relocating for career advancement. There is certainly a case to be made if you plan to live somewhere for a long time for homeownership, but if you’re uncertain about how long you plan to stay it becomes less clear.

When you are unsure of how long you will be in a house there is a very real risk that should you need to sell the house into a down market in the first few years you might be underwater in your mortgage. This is exacerbated by the fact that something that causes there to be less opportunity for employment where you bought your house could have the double whammy of forcing you to search for a job while selling into a down market. This is a huge risk since people typically will need to tie up a large chunk of their net worth to get into a house and early mortgage payments go mostly to principal. In other words, early mortgage payments do little to give you more principal and downward swings in value are your problem, not the bank’s if you need to sell.

This isn’t a case against home ownership. This is a story about investing and time. When people look back at the value in their house, they’re mentally anchored to things like their purchase price, without considering all of the other costs associated with owning a house or even thinking about the fact the mortgage forces you to make 360 payments over 30-years and you may have paid more in interest than principal over the length of the loan!

There is no panacea, there is no way to get rich quick but certain behaviors over long periods of time make success more likely. Home ownership can be a cornerstone to building wealth, but so could any number of 30-year systematic investing plans. So, there are certainly reasons to consider home ownership, but it is by no means a requirement for success.

Photo by Sandy Millar on Unsplash

[i] [i] I am referring to a 30-year FRM as “typical” See source for information on various other loan options

[ii] This is an example of the availability heuristic, and survivorship bias, the examples that come to mind are not representative.