Financial Planning, Retirement Plan, 401k, Investment Blog

Financial Planning, Retirement Plan, 401k, Investment Blog

Is Your Home Still a Good Investment?

Posted May 15, 2009 by Bernz

Earlier in the decade, it seemed like the old adage of “your home is your best investment” was a solid piece of financial advice. Housing prices across the country, especially in coastal areas, were booming. Homeowners who had purchased their homes ten to twenty years previously were making great profits on the sale of their homes.

And then along came the housing crisis of 2008/2009. As the mortgage market tightened up, houses sat empty waiting for buyers who never came. People found it difficult to refinance their mortgages to access the built-up equity in their homes. Instead of moving up to larger homes, many chose to fix up the ones they had. Housing prices dropped like a stone with an oversupply on the market and not enough buyers.

If the value of your home is part of your long term retirement plan, this new reality must be factored in as it may be here to stay for years to come. If your home drops in value to what you paid for it or less, does it make sense as an investment tool? Yes and no.

Homeowners can no longer count on their homes increasing in value and providing a solid long term investment return. But that doesn’t mean it’s not a good idea to own a home. Let’s look at the alternative: renting. Rents also rise and fall along with housing prices. That means that renting right now is less expensive than it has been at any other time this decade. However, when the housing market turns upward again (as it eventually will), renters will be caught in the appreciation and will be stuck with higher living costs. Those who continue to own a home throughout this entire period will have an asset that is rising in value, protecting them from cost of living increases.

Another reason why your home is still a good investment is that it demands that you continue investing. You have most likely borrowed to purchase your home and part of the monthly payment you make goes towards paying down the principal balance of the loan. That means that every month, your equity in the property increases because you are paying off the mortgage. At the end of the mortgage, you will have a fully-paid asset. It’s similar to a forced savings plan.

Continuing to invest in your home makes sense for most individuals. Housing prices will fluctuate over time as will all investments, but in the long run, real estate is still a solid plan.

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