The American dream is a goal we’ve all heard of at some point in our lives. This dream involves raising a family, building a successful career, and (most importantly some would have us believe) owning a home. Everybody dreams about owning a home and it’s marketed as your biggest asset in life.
But is owning a home really your biggest asset in life? You start paying the mortgage and equity begins to build, but you have to remember that the typical mortgage spans 30 years. Who really stays in their homes long enough to reach that 30-year mark to have their house become a full asset nowadays? With house maintenance, and the fluctuating value of the housing market coupled with how long someone stays in their home, a house can actually be a liability on the balance sheet and an expense on the income statement.
Think about it. The upkeep on a house is a constant. A good rule of thumb is to estimate maintenance at roughly 1% of the value of a home each year. Until the house is paid off, you have a mortgage that is debt, along with sunken costs of maintaining a functioning home such as water heater replacement or kitchen appliance replacement. That’s money down the drain just to maintain your homes value or increase it minimally.
Plus, gone are the days when everybody just buys a home they live in forever. A buyer of a single-family home tends to stay in that particular home for about 13 years in this day and age. Of course you’re building equity in your home in the meantime, but by the time interest is paid on the loan, the equity being put into the home is hindered. Plus, you have to pay a substantial commission fee to a realtor to market and sell the house when you want to move.
Lastly, the natural fluctuation of the housing market may affect the value of your home. 2008 is the most recent, and most extreme example of how the mortgage market can become over inflated. Owning a home doesn’t guarantee that you will never be upside down on the home, and there is always real risk in owning a home such as natural disasters wiping everything out. If the subdivision you reside in begins to experience a decrease in property values, the investment in your home begins to lose value through no fault of your own.
It’s Not All Bad Though
Yes, a house can very much be a debt. Still, many people own a home and end up making it work in their favor.
For one, and perhaps most importantly, the mortgage acts as forced savings for people who own a home. They may not get a great return on the asset, but most people are diligent about paying their monthly mortgage bill, and thus continue to build that equity through the years of ownership.
Secondly, real estate has been an appreciating asset long term around the developed world. Hold the asset long enough, don’t keep using the equity like an ATM machine by serially making cash out refinances, and everybody will have positive equity eventually.
The idea of telling someone their house is more of a liability instead of an asset is thought provoking. There will always be push back and reasons why that statement is invalid, but it is a conversation that needs to be had because assumptions can often lead to ruin. Too many people rush into home ownership without weighing all the pros and cons in search of the American dream. Maintaining a home, fighting potentially lowering property values, and moving costs are all reasons a house is in fact a debt and not an investment.
Owning a home can be a great decision, but it doesn’t work for everybody. Don’t automatically assume you are doing yourself a favor by stretching yourself financially to squeeze into that dream home. It could be the disaster you couldn’t afford.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.