Your home is not an investment

This devil's advocate post comes from Jim Wang at partner blog Bargaineering.

A few years ago, when the housing market was sizzling hot, everyone and their mother talked about how their home was a fantastic investment. They talked about how a home that sold 10 years ago had quadrupled in value over the last five and cursed themselves for not buying more.

I knew someone who owned four rental properties, all bought with adjustable-rate mortgages, and was making a "killing" on the rents and appreciation. I knew someone else who was looking at his paper riches and marveling at how wonderful homeownership was.

Then the housing market stalled. ARMs reset. People were in rough shape. Those who overextended learned something the prudent have always understood: As much as your home is a great place, it's not an investment.

• Bing: Search for a new home
  

Value appreciates with inflation rate

There's a great analysis of home appreciation versus inflation that concludes that home prices don't appreciate faster than inflation. Michael Bluejay takes a look at historical data provided by the U.S. Census, the National Association of Realtors, and the Case-Schiller Index, so it's not a guess. It's based on hard data.

One big insight that I think many other analyses miss is the increase in the average size of a home. When you look strictly at census data, new homes increased in value an average of 5.4% a year, compared with 4.4% annual inflation over that same period (1963-2008). However, when you consider that the size of a home increased from 983 square feet to 2,349 square feet, you'll see that we're simply buying bigger houses.

An investment has to beat inflation, not match it, because otherwise you're taking a risk for no reason.

No improvement is profitable

Every year, Remodeling magazine does a survey on the best home value renovations. No matter which year you look at, there is never a remodeling job that ends up being profitable. In 2007 and 2008, the best home value renovation was adding a deck and that topped out at 85.4% and 81.8%, respectively.

So, as your home ages and needs major repair work, you're immediately taking a loss on that "investment." Our home was 25 years old when we bought it. In the last three years we've replaced all the windows and replaced the roof at a total cost of $12,000.

Carrying costs

When people talk about how they bought their house for X dollars and sold it for Y dollars, they rarely talk about the interest and property taxes they've paid. It's very exciting to hear about a home that has doubled or even tripled in value (or more!), but property taxes and interest are annual expenses that often get ignored when we're looking at the headline numbers.

Even when you account for the tax benefits, the costs can be substantial. The national average effective property tax rate (2000 census data) is 1.1127% and the national average value of a home is $158,934, so you can expect to pay $1,768 a year in property taxes. Slice off 25% for income taxes and it's still $1,326 a year. It's not an inconsequential amount to pay each and every year.

Transaction fees

If you want an investment, buy a stock. You can get into and out of a stock for free at Zecco, for $2.95 at OptionsHouse, and for $4.95 at TradeKing. Want to buy or sell a house? Be prepared to fork over 4% to 6% of the sales price as a commission to the real estate agents involved. Can you imagine paying 4% to 6% of each stock transaction? No one would ever do it.

Not only are the transaction fees high, the market is illiquid. Buying or selling a home can take a long time. With a stock, you can expect it to be gone within minutes in a marketplace that has many participants. You sold it at the best price possible the moment you sold it. With a home, you can't be sure. If you have only one buyer or you are the only buyer, you don't know if you have a good price because it was determined in an open marketplace.

Summary

There are many benefits to owning a home and I'm a huge fan of it, but don't justify buying a home by thinking a home is an investment. It's not.

It is, however, a place to live, a place to make your own, and a place to make yours. It's a place to put down roots, to raise a family, and to grow old in. It's a place to call your own, it's just not an investment. It's a home.

Related reading at Bargaineering:

• CD rates
• TradeKing vs. Zecco: Discount broker comparison
• How to win the lottery