I found an interesting article over in the money section of USA Today detailing why a home is not a great investment.

I agree with most of the points in the article, with a couple of exceptions:

  • The timeframe quoted covers the last housing boom. As such, the returns the author quotes are still inflated compared to real long term ownership. Academic research has proven that over a long time horizon, the “returns” on a house essentially mirror inflation. Which makes sense, because otherwise the overall housing affordability would be even worse than it already is, especially in places like the San Francisco Bay Area.
  • The author appears to leave out one of the important financial reasons for owning a home, namely locking in your cost of housing. Once you purchased a home with a fixed rate mortgage, a big part of your housing cost is fixed for the duration of the mortgage. Yes, there is still a volatile component in taxes, insurance and upkeep, but the overall volatility is lower than the volatility on rents. The good news is that bought right, partially fixing the cost of housing can actually enable the owner to invest and save more over time as the housing cost goes down as part of the overall income.

But overall I do agree with the author - a house isn’t a substitute for retirement savings or any other investments. It’s a roof over your head and a place to come home to.

Obviously there are ways to make a house work for you as an investment, but those are usually the slow-and-steady investments like a rental property that can be rented out for the long term at a reasonable return. Any increases in value over time then are gravy and much more easily weathered than buying too much house as a retiredment plan. That’s why I’m making the distinction between “home” - somewhere you live - and “house” - somewhere you don’t live.