“Want to be wealthy? Then you should buy yourself a house!”… said the person that knows nothing about wealth building. Sure, buying a reasonably priced house is often better than renting, but it’s not a wise investment. Truthfully, buying a house is a terrible investment – one of the worst that you’ll probably ever make.
Your House is a Terrible Investment
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“What do you mean, Derek? I was always told that it was wise to buy a house, and look at home prices today! They’re going up like crazy!”
Let me just jump into it with the facts here…
Average Home Appreciation
Since 1963, home prices have appreciated by an average of 5.4% per year. Sounds pretty decent right?
And let’s just say that in 1963 you bought your first house (assuming you were alive then…and if not, just humor me here. You’ll still learn something I promise) for $18,000 and never moved. Today, your home would be worth $321,100. BOOM! Thank you home appreciation!
Average Stock Market Appreciation
When people talk about the “average movement of the stock market”, they’re typically talking about the S&P 500. This is simply an accumulation of stocks for the top 500 companies in the U.S. In aggregate, the way the sum of these 500 companies move – that’s the way the market as a whole is moving as well. It’s a great measure and it’s been around for ages.
So you probably know where I’m going with this…. If houses appreciated by 5.4% since 1963, what did the S&P 500 do? Are houses really as good of an investment that everyone claims they are?
As you may have guessed, the S&P 500 earned more than the average home since 1963. Instead of 5.4% growth, the S&P 500 grew by an average of 10.0%.
“Okay.” you say, “So it did better, but only by about 4% a year. I still might rather have a really nice house vs. investing the money elsewhere.”
You know the chart above with the appreciating values of the average home price? I made a similar chart for growth of the S&P 500. If we started with $18,000 in 1963 (the same amount as the average home price), what do you think that amount would have grown to today? $500,000? $750,000?…
Try again… $3.1 million dollars – almost 10X the amount of that “great house investment”… Yikes!!!
And you know what? I could make this chart look even worse. Houses take upkeep (approximately 1% of the home’s value each year). I’ll stop the rant now…I think you get the picture. 😉
So What Now? I Shouldn’t Buy a Home??
So what am I driving at here? If you have the option to buy vs. rent, would I tell you to rent all your life? Absolutely not. If you’re debt free and have at least a 10% down-payment for a house, then knock your socks off. Owning a home will help your financial future…as long as you do it right.
What I am saying in this article is, “Be careful how much home you buy.”
Buying a house keeps you from throwing your money down the toilet in rent each month, but based on the charts above, it’s obvious that it won’t make you wealthy.
So buy only as much house as you need.
- If you’re a family of three with an average income, buy no more than a three bedroom house and keep the square footage around 1,500.
- You’re one guy? Stick with the 1 bedroom condo near your work.
- If you and your wife are both doctors and earn a combined income of $600,000 a year, that’s great! But don’t spend any more than $1,000,000 on your home please…
You see, wealthy people already understand that a house is a terrible investment. It’s why only 9% of their total net worth is tied up in their house.
Related: How Much House Can I Afford?
If you want to be wealthy in the future, don’t handcuff yourself with a huge mortgage. Spend the lowest amount you can while staying content, and then load up on your other investments! You know, the real ones…like the stock market and rental property.
Would you have guessed that a house is a terrible investment? Are you too heavily invested in your house?
Recommendation from the Author:
If the stock market is so much better than investing in a home, then where should you go to get started? I’m a big fan of Wealthsimple. The process is simple, they make investing easy to understand, and they’re a socially responsible company (Oh, and they’re available in Canada too!). Get started with a $100 investment, and they’ll give you $50 for free!
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.