Housing…A Smart Investment or Just a Place to Live?

In my recent study, Ten Ways to Wreck Your Retirement, I pointed out that relying too much on home equity for retirement income can spell trouble. A Wall Street Journal has reiterated the potential pitfalls of relying on a mortgage to make you rich.


Certainly in some markets, housing values have appreciated tremendously (at least they did for a while), but according to author Brett Arends, once the cost of borrowing, closing costs, and the paltry tax benefits are factored in, the rate of return on housing is – well – not exactly enough to make one rich.  Arends points out that the annualized rate of return on housing since 1987 has been 4.1 percent. Compare that to the annualized return of 8.67 percent on the S&P 500 during the same time.


This does not mean that a pop-up camper should replace the single-family home as a dwelling of choice. But it might be a good use of money to forego the McMansion-style home as an investment vehicle and allocate those funds to other assets.


Comments (3)

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  1. Michael says:

    I think too many people forgot the “what you can afford” part in buying a home. Job losses haven’t helped the situation either.

    So when it comes to buying a home “you can afford”, and if their home did appreciate in value during the boom, then it is worth considering separating the appreciated equity for three reasons.

    Liquidity-The number one rule is to have access to your money when you need it, and in the event of a job loss, rather than paying down your mortgage creating equity that you can’t get to, you have a safety net of funds to get you through that period.

    Safety-It’s safer to have equity separated in the event of a natural disaster or housing bubble burst, because you control the funds.

    Rate of Return-Equity in the home has no rate of return. But separated, you give it the opportunity to earn interest.

    You don’t separate equity for the deduction, but because it still factors in, consider if you borrowed $100K at 5% ($5,000/yr) on a 30 year fixed rate mortgage. In a 34% tax bracket, that is like borrowing at 2.5%! By simply reallocating $5,000/yr in IRA contributions, they get an equivalent tax deduction plus $100k compounding immediately for their retirement (and the liquidity if they lost their job.) It would take almost 20 years of saving $5,000/yr to even get to $100k.


  2. Equity Release Specialist says:

    I agree, especially for the US where the housing market is much more volatile than here in the UK, but that is to be expected given there is so much more land where you are! The average pension fund in the UK is approximately £40,000, which doesnt get you very much i can assure you. So there seems to be a growing trend here where people are now releasing the equity from their property through equity release schemes. With no negative equity guarantees in place and the ability to move home i believe it is a great option for some.

  3. Tamara says:

    humm….well, the problem is that what you can afford today may be short-lived fortune and 20 years from now as you are 5-10 years from payoff and fortune reverses,in a down economy. but an opportunity to reinvent one’s self jumps in front of you. Retirement NO, but sometimes it can make sense, but I think after all we have been through….if you cannot fund your need for 40% of your available equity, do not think about it. Just don’t do it! Unless the risk is so low in a rip roaring economy, that the time/money factor that the repayment is short in time and high if payout.

    In addition if employer’s would focus more on the education need of their needed projected labor skills, and start paying someone to get a degree in X area to work for us for a min. of Y time, and work for us while we send you to back to school, if necessary would be a better focus than to mandate employee healthcare. Not fulfilling the bargain could be costly, one you were more than 25% through. This is offered in healthcare fields, but ….funny….the schedules of the healthcare worker are always manipulated to be a stumbling block to the would be student to the point the student drops out. SAD! It did not use to be that way….