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Owning costs more than the mortgage
Interest and taxes
Mortgage interest is money paid for the use of money, and it is gone. Property taxes, somewhere around 0.5% to 1% of the price and sometimes higher, buy utilities and some services, yet nothing is left afterward either. Home prices have historically risen about with inflation, maybe a little more, while stocks have far outpaced it, so equity sitting in a house misses returns it could have earned.
Maintenance costs
Maintenance is the cost people underestimate most. Years ago 1% of the home's value a year was the usual estimate, and academic literature points to over 2%. A homeowner of six years finds his own maintenance bills far higher than either figure. The phone calls to find a contractor, and the wait for the contractor to show up, cost time on top of money.
Emergencies and renovation
Emergency costs add a hidden one. A new roof or a cracked foundation needs cash or liquid assets sitting ready, which means money that is not invested in stocks. Renovation adds more, since fixing something rarely returns it to its old baseline and it ends up a little nicer, spending a renter never does.
Why do home prices lag stocks over decades?
Yale economist Robert Shiller's long-run index of US home prices shows prices roughly flat after inflation from 1890 to the late 1990s. A house is a building on land, and buildings wear out, so mostly the land beneath tends to gain real value. Stocks are claims on company profits, which grow with the economy. US home prices ran well ahead of inflation from the late 1990s to 2006, then fell about 27 percent nationally in the financial crisis, according to the S&P CoreLogic Case-Shiller index.
Why does home maintenance arrive in lumps?
Components of a home have limited lifespans, and the National Association of Home Builders has published tables of them. Roofs, water heaters, and furnaces each wear out on different schedules measured in one to a few decades. Because replacements arrive at different times, spending comes in lumps instead of a steady stream.
Why do renovations rarely repay their cost?
Remodeling magazine's annual Cost vs. Value report compares what projects cost with the resale value they add. Most projects in recent editions have recouped well under 100 percent of their cost at sale. The report is based on surveys of real estate professionals across US regions.
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