Is Your Home An Investment?

It is certainly heartwarming to see so many apartment dwellers and other renters growing more of their own food and otherwise practicing the principles of permaculture. Most New American Homesteaders, however, either own a home with some outdoor space, or plan to do so in the near future. Interest rates for home mortgages are at historic lows, but unfortunately credit restrictions create obstacles for potential buyers. As discussion regarding the housing market, the burst bubble of recent years, and other economic questions ebbs and flows, we hear two schools of opinion about home ownership. One school, championed by the real estate industry and mortgage lenders, contends that a home is a great investment. The other, championed by financial planners and investment advisors, holds that the opposite is true, that a house is an expense, no more an investment than a used car. Who's correct?

 

On the "good investment" side lie, for example, tax benefits. Mortgage interest is fully deductible, so long as the total amount of outstanding debt does not exceed the value of the home. Deducting mortgage interest can provide significant tax savings. When the house is eventually sold (presumably the goal of anything regarded as an "investment) the first $250,000 of capital gains (the difference between what you paid for the house and what you sell it for, adjusted for factors such as the cost of improvements) is exempt from the 15% capital gains tax. Traditionally, a house held for a decade or more increases in value. A house purchased in 1990 for $85,000 might sell for $140,000 today. Although the market is, at present, depressed in many areas and prices are well below previous levels, this is likely to be a shorter term phenomenon. Nominal home prices today in most areas are still above what they were 20 years ago.

On the "bad investment" side are some cold, hard facts. In terms of real dollars, home values barely outpace inflation over time, and they can actually decline. If you do sell your house for a lot more than you paid for it, your gains are offset by several costs that accrue to any house: mortgage interest, insurance and fire protection costs, together with the fees and expenses associated with the purchase and sale transactions themselves. Also to be deducted are the costs of improvements and/or repairs made during the owner's tenure. When you subtract all of these, home ownership does prove to be an expense, overall. Not even a middling good investment.

Why then do so many people aspire to home ownership, and why are so many convinced that they are, in fact, making a good investment? The answer lies not in the financial calculations, but in our attitude toward home ownership. It is, simply put, a part of the "American dream," not to mention the numerous advantages of being able to exert a measure of control over your living space. We have long associated the idea of "family" with the notion of "home and hearth." Apartments are for singles.

Because the nominal price (the price in current dollars, not the same dollars used to purchase the house) of a house does tend to go up over time, people may take a measure of security from knowing that they won't "lose money" when they sell. And selling a family house in order to purchase a smaller, cheaper property for retirement is a common practice. But you should never have the house as the centerpiece of your retirement plans, as you might do with a stock portfolio (generally considered to be an excellent long term investment).

Homesteaders have numerous options to capitalize on their status as property owners to help defray some of those costs of home ownership:

• vegetable gardening can reduce the grocery bill
• adding perennial food plants, like fruit trees, makes sense when you own
• you have the option to invest (really) in improvements that will bring long term savings in energy costs
• you can own domestic animals, in some locations
• you can operate a business from your home, sometimes with local restrictions

We could not practice permaculture to the degree we are able here, if we lived in a rental. We also derive a huge amount of satisfaction from gardening and "doing things around the house." We don't consider maintaining a house and gardens "work," even though it can involve strenuous exercise. Home ownership, therefore, may be right for us and not for you. Regardless, in terms of financial security, one should always consider the real costs of owning a home, and not be lulled into unrealistic expectations.