Homeownership: The Good, the Bad, and the Expensive - Rodgers & Associates

Homeownership: The Good, the Bad, and the Expensive

The median home price in the United States reached $454,900 at the end of the third quarter of 2022. That is an increase of 38% over the median home price before the start of the COVID pandemic.

Median Sale Price of Homes in the U.S.

2000$165,3002022 Q3$454,900
Source: Federal Reserve Bank of St. Louis

Homeown­ership is often lauded as a great way to build wealth. Many people believe owning a home has been their best investment. Consid­ering what has happened to home prices since 2020, is buying a home still a good idea? Has owning a home really been a good investment?

The housing market may be cooling off partly due to rising mortgage rates. Mortgage rates are a direct cost of homeown­ership, and the combi­nation of higher home prices and mortgage prices can deter buyers.

The U.S. has experi­enced many housing booms and busts—and some are quite severe. The bust in the 1990s was mainly caused by interest rates that rose to 14%. Defaults on subprime and high-risk mortgages fueled the housing bust of the 2000s. Home prices fell 36% from December 2005 to February 2012. The next housing bust could be just around the corner—or many years away.

There are good reasons to buy a home, but a personal home purchase should not be viewed as a strictly financial investment. A 38% increase over three years would be a reasonable return if it were net of expenses. However, there are costs to buying and selling homes: closing costs, taxes, insurance, title searches, and other fees at settlement. During ownership, you will be respon­sible for mortgage interest, real estate taxes, mainte­nance expenses, insurance, and more. Once all homeown­ership costs have been considered, you may find that your home has merely kept pace with inflation.

Nobel laureate and Yale economics professor Robert Shiller collected data on homeown­ership showing the average home price has increased only 0.6% annually over the past 100 years on an inflation-adjusted basis.

According to Shiller’s research, during the housing market’s best 30 years (1976–2005), real price appre­ci­ation averaged only 2.2% per year. In the worst 30 years for housing (1895–1924), real price appre­ci­ation averaged a loss of 2% per year.

Shiller points out that homeown­ership comes with many costs, including mainte­nance, property taxes, insurance, and possibly private mortgage insurance (PMI) and HOA fees.

In a sense, a home is both an asset and a liability. You buy a house and can sell it at some point in the future as an asset. However, it is also a liability in that there are ongoing expenses. You will need to maintain the home in good condition for it to hold its value. The local government will levy real estate taxes against the property annually. When you eventually sell the house, more expenses will most likely be incurred at settlement, typically ranging from 2% to 6% of the purchase price.

Is the alter­native throwing your money away on rent? Renting a home can sometimes be less expensive than owning one. Consid­ering only the 2–6% costs to buy and another 2–6% to sell a home, you would need to hold onto the house for several years to break even.

Renting can also save on some of the expense of mainte­nance, home repairs, property taxes, and insurance. As a renter, you need to insure only your belongings, which is less expensive than homeowner’s insurance.

The U.S. Census Bureau’s Consumer Expen­diture Survey compares total housing costs for homeowners with a mortgage versus renters. Total housing costs include mortgages, real estate taxes, property insurance, homeowner’s associ­ation fees, utilities, mainte­nance, and other expenses.

Mortgage interest and
Property taxes$3,695$30($3,665)
Mainte­nance, Repairs,
Insurance, Other
Other Lodging$1,316$412($904)
Utilities, Fuels, and
Public Services
Household Opera­tions$2,220$921($1,299)
Furnishings and
Data source: U.S. Census Bureau (2020). Values in paren­theses are negative and indicate expen­di­tures on which homeowners spent more than renters. *Note: in the Census Bureau data, some renters reported a small amount of mortgage expen­diture, and homeowners reported a small amount of rent. This is likely due to changing from renter to homeowner or vice versa during the year. We’ve removed the values from the table to keep it straightforward.

According to the Census Bureau’s American Housing Survey, many renters paid about 33% less per year than homeowners when all monthly costs were considered. The data in this survey was based on infor­mation obtained in 2020. The actual amounts are higher today, but it is reasonable to assume costs have risen propor­tionally. Home buyers also have additional expenses in their first year due to down payments and closing costs.

However, owning a home is not just a financial decision. There is the pride of ownership and the ability to person­alize the home. Renters, in most cases, are very limited in terms of changes. Many people find that owning a home provides security: knowing the rent will not go up, the rental management company won’t change, and new neighbors aren’t likely to move in every year or two.

Stage of life is another signif­icant lifestyle factor to consider. Empty nesters may decide to downsize, and renting can provide the flexi­bility their lifestyle goals require.

Start with a clear vision of your future needs and be honest about your financial situation and desire for homeown­ership. Buying a home will almost always mean higher monthly payments than renting in the same locale. But there are mental, emotional, and possibly long-term financial benefits.

There is no universal rule of thumb for deciding whether to rent or buy a home. You must live somewhere, and there are going to be expenses. There will always be a cost to bear—whether rent, mortgage, or otherwise. Generally, renting in the short-term (several years) and buying in the long term (decades) makes sense.

Rick’s Insights:

  • The average home price has increased only 0.6% annually over the past 100 years on an inflation-adjusted basis.
  • A home is both an asset and a liability. It can be sold like an asset at some point in the future, but there are ongoing expenses that come with homeownership.
  • Buying a home will almost always neces­sitate higher monthly payments than renting in the same locale.