It can be a complicated decision to determine if you should rent or buy a home. And if you’re leaning toward buying, high housing prices and high mortgage rates are likely making that decision even more difficult. Current economic conditions aside, buying a home is generally considered a safe investment. But there are some important risks to consider and your individual plans also play a role. In general, though, when you put your money towards buying a home, you can see a return on your investment over time. Here’s why buying a house could be a good investment. You can also consult with a financial advisor to see if it’s a good investment for you.
Historical Record of Housing Price Appreciation
Economic data from the St. Louis Fed paints a fairly rosy picture of home appreciation in the U.S. over time. For instance, from January 1975 to December 2022, home prices climbed by around 1,238%. So if you purchased your home for $40,000 in the winter of 1975, today that home could be worth close to $530,000.
Of course, this example assumes you held onto your house for nearly 50 years, which is a very long time to own. Let’s assume instead that you purchased your home in the winter of 2003 and opted to list it in 2023. According to St. Louis Fed data, the average cost of a home in January 2003 was around $230,200. If you sold your home for the December 2022 average of $530,000, you’d see a profit of around 130%.
Factors to Weigh Before Investing in a House
While a 130% gain on a 20-year investment is impressive, there are also several things to consider before you invest in a house. In 2023, mortgage rates are a key consideration, with data from the Fed indicating the national average rate for a 30-year mortgage is 6.13%.
To put that in perspective, if you purchased a home for $400,000 with a 20% down payment and a 30-year mortgage with a 6.13% rate, you’d pay over $420,000 in interest over the life of your loan. Of course, it may be possible to refinance your mortgage when rates decrease.
Beyond the interest you’ll pay on your home loan, taxes and upkeep costs also factor into the total cost of homeownership. Of course, the amount you pay in taxes will vary depending on where you live. Property taxes vary widely by state and city or town.
Other considerations include your age and other potential investments. For instance, if you’re young and have a long time horizon until retirement, buying a house may make more sense. You could own your home for several years, your earning potential will likely increase over time and you’ll likely be able to set aside more money for retirement. But if you’re older, it’s possible buying a home could set you back financially and serve as a roadblock to building a retirement nest egg. You’ll likely need to make a down payment, which is often a large upfront cost.
Risks of Having a House as an Investment
Before you decide to buy a home, it’s important to consider the risks and rewards. Historically, home prices have increased over time, with some decreases over the years due to recessions and housing market declines. But historic increases don’t mean future increases.
Unfortunately, nobody can predict how the housing market will change over time, so while it’s possible your home could gain value, it could also lose value. Timing also plays a role in how much your home will appreciate or depreciate. For instance, if you decided to buy a starter home in 2023 and sell it two years later, it’s possible you won’t make a profit on your sale. But if you held onto that home for a few decades, it might be a different story.
Rewards of Having a House as an Investment
Despite the risks, the potential rewards of having a house as an investment are great. There’s the tangible reward of owning your own property and creating a home that’s uniquely yours. If you choose to have children, you’ll also have a secure and comfortable place for your family to grow.
Plus, your home could also increase in value considerably over time, depending on market conditions. If it does, you could benefit from a potential profit of hundreds of thousands of dollars when you decide to sell. Alternatively, you might decide to keep your home and pass it down to your child or children, which could spare them the burden of a hefty mortgage or help them build a nest egg after you’re gone.
The Bottom Line
Purchasing a home can be a smart investment, but it’s one that requires careful thought. Timing also plays an important role, as buying when interest rates are high could result in exorbitant interest payments over the life of your loan. Still, there are many benefits to owning a home and historically home prices have appreciated significantly over time. While there are no guarantees this appreciation will continue, homeownership comes with other rewards as well.
Tips for Buying a House
- Any time you make a large financial decision, such as buying a house, it can be wise to talk to a financial advisor. These professionals can help get your finances in order to help you understand how much you can afford and how it impacts your long-term retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can use a mortgage calculator to help you estimate what your payments will be if you’re borrowing to buy a house.
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