Why Your Home is a Bad Investment

I recently helped a client who made a hefty sum after purchasing the home just two years earlier. In just two years, the home's value went from $410,000 to $622,000. I was shocked and, of course, delighted for my client, but this is not the experience that most of us have with our homes. Like the bull market we've seen in equities these past five years, the real estate market has only gone up since it bottomed out locally in 2012.

But for most of us, a primary residence should not be considered an investment. Here are a few reasons why:

A HOME IS NOT LIQUID

You have to live in it, which makes your primary residence is a highly cumbersome asset. For most people who have watched their homes appreciate over the past few years, it's exhilarating to see neighbors fetching high prices, but selling means that you're also stuck buying in a hot market unless you plan to rent. A rational investment strategy might suggest that, if I have doubled my down payment in a home I purchased two years ago, I should sell immediately. But life isn't that simple. I live in this investment with my wife, Ashley, and our dog, Harry! This brings me to my next point;

WE'RE IRRATIONAL ABOUT OUR HOMES

I've told countless homeowners the hard truth that their home is worth less than they thought. I was told this myself when I sold my condo two summers ago. This leads us to over-pay for a home we must have or over-inflate our home's value in our heads. It can also lead us to wait for the elusive "top" of the market to sell, or the "bottom" to buy; but even professional investors can't predict what markets will do consistently.

HOUSES ARE LIKE CARS

Houses might last a century or more if they are well built and well maintained, but they wear out! Homes go through cycles of obsolescence and renovation throughout their lifespan, even with the most responsible owners. Most of us forget about all of the money we pour into home maintenance when we go to sell, but it's real money and you probably won't get it back when you sell!

MARKETS ARE VOLATILE AND SEASONAL

We've recently seen home prices surpass their pre-bubble levels in the Seattle area, so it's tough to dig into our long-term memory and recall what it was like for so many (myself included) who bought during the years leading up to summer '07 and had to watch values plummet for the next five years. What if a job change or family emergency meant you had to sell during that down period? (See reason #1.)

Homeownership has tons of benefits and I, personally, have really enjoyed owning a home, but it's not the key to financial success or a quick windfall. For most people, owning a home that's within their means is a good financial decision if they plan to hold the property for a long period of time, but you should carefully consider your long-term plans for the home and think about how how easy it will be for you to sell it when the time comes. In my next post, I'll talk about what makes homes easy to sell. If you buy in a seller's market, be sure to consider the following: how will my home weather a downturn?