By Mike Bodeen · 16 July 2018
How should we view our home? Should we see it as a long term financial investment? Or should we see it not at all as financial but as personal – as in a shelter from the literal and personal storms that just happen in life?
The answer is — both, with caveats.
In the past 17 years, our local real estate market rocked and rolled, went up and down, positive and negative. The average psf (sales price per square foot) soared to $184 in September of 2006. It then plummeted to just $84 psf in June of 2011. When all the dust settled however, our current real estate market has risen in value from $80 psf in June of 2001 to $157 psf in June of 2018.
Regarding the financial investment, the only fair comparison is an owning versus renting scenario.
If we go back to say June of 2001, we could see the average sales price per square foot (psf) was $80. If we took a 2000 Sq Ft home, the price of that home was $160,000 (2000 Sq Ft x $80). That home today, based on June 2018’s average psf of $157, is worth $314,000!
Let’s compare a little deeper. Back in June 2001, the average Freddie Mac mortgage rate was 7.16% for a 30-year fixed rate mortgage. If back then you applied a 5% cash down payment, your monthly mortgage payment of principle and interest would have been $1037 based on an initial mortgage amount of $152,000 ($160K – $8K). If we add about $4000 in buyer closing costs to that $8000 down payment, you would have had an initial cash investment of $12,000 for the home-buyer.
Going deeper still, let’s compare the cost of monthly rents versus monthly mortgage payments. To stay out of the tallest weeds, let’s call this a wash. In fairness however, let’s say we as an owner would need to add a new roof and AC unit plus other assorted costs an owner or landlord must pay for. Let’s reasonably call that amount $30,000.
So, if we add $30,000 to the original cash investment of $12,000, the total cash investment would now increase to $42,000. Therefore, if we’ve invested $42,000 and the current house value is $314,000, and if we subtract the current mortgage balance of $104,000, we’ve made $168,000. This is a 400% ROI in 17 years.
So, how does this compare to renting? In this example, the renter and homeowner are a wash on the monthly costs of housing. The homeowner’s investment of $42,000 brought a 400% return so the homeowner pockets $168,000. The renter has zero to show for his renting. But, again in fairness, we would say the renter could also have invested the $42,000 in funds that he didn’t have to spend on a home purchase and spent it on another investment type. How would they have fared? Well, that’s anyone’s guess.
Now for the personal.
If in the above example the renter wisely invested his $42K and equaled the ROI of the homeowner so that it was a wash, the winner, without argument is still the homeowner — by a country mile!
Why would the homeowner be the winner? Because the homeowner had a home, a constant refuge, a permanent place to hang his hat. With slight variance, the homeowner always knew how much his next monthly payment would be, whereas the renter would likely see periodic rent increases. The homeowner wasn’t worried that the landlord would sell the home or lose it in foreclosure also forcing them out. The homeowner could even paint his interior walls D-Backs purple, or Cardinal red, and he didn’t need a landlord’s permission.
In the end, it was their home. And that’s what helps make a house a home.