You Are an Idiot if You Don’t Buy a House
The Real Estate vs. Stock Market Return on Investment
Historically, over the long run your ROI on your house will be higher than the Stock Market. Plus owning a house has one more BIG advantage… YOU can’t live in Stock Certificates.
Let’s take a look at the average return of the Stock Market for the last 20 years…
(Hyperventilating in a bag) Look at all those swings. Up and down. Up and down. With swings like that, make sure to keep your therapist on speed dial!
The average return from 2000 to 2019 was 7.68% for the S&P 500.
So, $50,000 invested in the year 2000 would have been worth $162,066 at the end of 2020.
THAT’S NOT BAD! That is a respectable return! And if you already own a home, then I think everyone would agree that it is smart to diversify…
But that’s not what we are talking about here. We are talking about the people who rent because they think they are better off financially…
Let’s look at the Home price appreciation over the same time period.
From 2000 to 2020, we have seen a Median Appreciation Rate of 3.85% for homes throughout the United States.
Please do keep in mind that this will vary from Market to Market. For instance in Boston we have seen a 10.5% increase from $222,000 to $690,000 in that same time period.
But let’s stick with this average 3.85% yearly return figure to show why investing in the stock market over buying a personal resistance that you can reside in is dumb.
It’s important to realize that a house appreciates off of the full asset value. Not how much you put down as a down payment. This is one of the major differences between stocks and real estate. Stocks you have to pay for the entire position up front. Real Estate you can leverage the asset over the long term. What this means is that a persons ROI will change based off of what they put down. The more you put down will ultimately lower your return.
Let’s take the same $50,000 in 2000 and invest it in Real Estate instead. In 2019, the average down payment for a house or a condo was 12%. So to make life a little easier lets say that $50,000 is used for a 10% down payment on a $500,000 house.
At 3.85% average median price appreciation per year, that same house is going to be worth $1,036,312. That is a $536,312 return! Same 50,000 over the same 20 years!
Here is the best part… Yes, the house was only appreciating at 3.85% per year, but it was appreciating off the purchase price of $500. This means that the real return off of the $50,000 investment is really a total return of 1,072% or an average return of 53% per year…
You heard that right… Over the 20 years that is a 10 TIMES return… A 1,072% return!
Oh, but there is more! But before going into additional areas of returns for houses… Let’s do a quick comparison.
Over the same 20 years you could have taken $50,000 and turned it into $162k which gives you a net gain of $112k in the stock market. Or you could take that same $50k and turn it into $536k with a net gain of $486k. So $112k or $486k?
Yes… Yes, it is true. Over that 20 years the homeowner will have to pay a mortgage payment and will have to pay interest on that loan. But unless the stock market guy is sleeping on his parents couch in their basement, then they are paying to rent somewhere!
Let’s dig into this mortgage issue a little. The average interest rate was 5.21% for a 30 year fixed mortgage over the last 20 years. Compared to rates today, this is high. Most likely someone would have refinanced along the way, but non the less… Let’s use it!
A homeowner’s payment is $2,474 at a 5.21% interest rate on a $450,000 loan balance.
Let’s also remind everyone that the $2,474 payment is locked… It will not go up unlike the rental payment which will increase as the market rates continue to climb.
So, a mortgage payment of $2,474 and let’s give the benefit of the doubt that a similar property rents for $2,200 and NEVER increases their rent over the next 20 years.
On the surface, that house buyer is “losing” $3,288 per year. But are they really losing it?
Did you know that interest and property taxes are tax deductible?
With a mortgage, the interest we pay is more at the beginning of the loan. So, to stay true and offer the stock guy a little ray of hope… Let’s take the average interest being paid on the loan over the 20-year period. The average interest on the loan being paid is $18,734.
This is where most renters will say SEE I TOLD YOU SO!
But as I mentioned earlier. That interest is tax deductible. So, let’s take a look at what being able to write off this interest and property taxes will do for a homeowner.
Let’s assume the property tax rate is $10 per thousand. So, we will say $5,000 for taxes. This would make the total write off for the homeowner of $23,734.
Now let’s say you earned $80,000 per year. And let’s use a 22% tax bracket. Well at $80k a year for the renter, they are paying Uncle Sam $17,600 in Federal taxes. The same homeowner earning $80,000 has a tax basis of $56,266 and pays $12,378 in Federal taxes.
And there we have found another $5k per year in tax savings. I guess even paying lower rent doesn’t really help the stock investor. The homeowner just put another winning trophy on the shelf.
All this, but I think it is also important to mention that after 20 years, the homeowner will have paid down $219k in principal making for an equity position of $805k in their house. All of this is off of a $50,000 investment.
So to recap. What is better? A $112k return for stocks or a $486k return with additional security, stability and tax benefits on the same $50,000?
In this analysis I gave every advantage I could to the renter and stock market investor. With all that being said, home ownership still comes out as the far and away winner and Champion of the Investment World.
I am Jeff Chubb with eXp Realty. You can reach me at 617-480-2600 or visit us online at Boston2.com.
You Are an Idiot if You Don’t Buy a House