The vast majority of homeowners and renters alike agree that owning a home provides a healthy family environment and is a major step toward long-term financial stability.
Hidden benefits to home ownership include tax benefits, improved health outcomes, and untaxed capital gains.
Additional and unexpected costs come with buying a house, like high closing costs, so ensure you see the whole picture before purchasing a property.
Americans are increasingly turning away from homeownership. According to the Federal Reserve Economic Data database, the percentage of total American homeownership today sits at slightly less than 66%. Charting and examining the proportion over time is illuminating and points to today's problem with homeownership. Let's examine whether or not buying a house is worth the investment.
Total American homeownership today sits at slightly less than 66%.
Specifically, the statistic swelled to an all-time high immediately before the 2008 Housing Crisis, before it fell 10% by 2015 – showing that average Americans paid the highest price for Wall Street misconduct by losing their opportunity to build generational wealth through home ownership. The proportion began to climb from there, peaking mid-pandemic in 2020 at about 68% - driven by bottom-barrel interest rates and loose monetary policy – before falling back to today’s current level.
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Because of the housing market’s whipsaw nature and today’s high mortgage interest rates coupled with sky-high home values, it’s little wonder many feel priced out of the real estate market. Or, worse yet, some feel the process and price of homeownership aren't worth the time and financial investment.
In many cases, though, buying a house is definitely worth it.
Why Buying a House is a Good Investment
Beyond the less tangible benefits – pride, comfort, and adaptability – buying a house as an investment generates real and identifiable financial gains. As interest rates rise, home sales are in a slump – in August, just 4.04 million existing homes sold compared to almost 4.8 million in August 2022. But this is a boon to prospective homebuyers, even if high mortgage rates are daunting.
Mid-pandemic real estate markets were skewed firmly to the sellers' benefit as home prices swelled to all-time highs. But today, the winds are shifting back in the buyers' favor. The average selling price for homes in the United States is about $495,000, down more than 10% from 2022's highs.
Home value dips make buying a house worth it today – mainly if you're focused on long-term financial gain by investing in home ownership.
Money Saved on Rent
Today, rent costs are at all-time highs. Average rent is slightly below $2,000, and all signs point to that stat continually rising. At the same time, average monthly mortgage payments are about 20% higher – with an important caveat.
Over a long enough horizon, home values increase along a reliable upward trajectory. As the saying goes, "Buy land while you can because no one is making more of it." With home ownership, you're investing in an appreciating asset. Consider a monthly mortgage payment an investment in your financial future and, in many cases, generational wealth if you pass the home to children or family members.
By comparison, rent payments simply ensure you have a roof over your head. In effect, your monthly rent is subsidizing someone else’s property investment. Wouldn’t you prefer to generate a return on your monthly housing payment for yourself and your family?
Greater Financial Stability
Owning a home opens new vistas for financial security and stability. If you own a home outright, you have substantial lending leverage if you need to take a short- or long-term loan to meet emergency expenses like medical costs or debt consolidation. But, even if you mortgage a home, you're investing in yourself. Consistently paying your monthly mortgage is one of the best ways to boost your credit score quickly, and, in many cases, a mortgage is treated more favorably by credit scoring agencies than revolving debt accounts like credit cards.
At the same time, remember that home values inevitably increase over a sufficiently long period. As your home value increases, so too does your net worth. Home equity, or the value of your financial interest in the home (the home value less the remaining mortgage amount), is one of the easiest ways to make your net worth explode.
When you buy a house, you also avoid the financial impact of being dependent upon a landlord's whims. While regulations vary by location, in many cases, your landlord can arbitrarily increase your rent or even elect not to renew a lease. Unexpected higher rent costs or finding new housing is financially and emotionally stressful – both of which can be avoidable through home ownership.
Many don’t factor tax benefits into their analysis when considering whether to buy or not buy a house.
Tax benefits include:
- Mortgage interest. You can deduct as much as $750,000 in mortgage interest payments from your taxable income by itemizing the cost during annual tax filing.
- Discount points. When you buy a house, you may be able to pay discount points at closing. Discount points can "buy down" your overall interest rate. These upfront payments are tax deductible.
- Capital gains. When you sell your home for a profit, you may be looking at a windfall profit, depending on when you bought your home and current market conditions. In other circumstances, capital gains of that magnitude come with a massive tax burden. But, if you used the home as a primary residence for two of the preceding five years, you can pocket as much as $500,000 in tax-free capital gains.
In some special circumstances, you can also write off home repair, home office space, and more on your annual taxes. Contact a tax professional to confirm, but the verdict is clear: investing in home ownership confers substantial tax benefits you can't get from any other asset.
One of the biggest benefits of home ownership is intangible. We referenced it above when discussing the mental stability home ownership brings compared to being subject to a landlord's desires and deeds. But that's just one of the many lifestyle benefits of buying a house.
Lifestyle benefits vary according to your preferences. But customization of your living space and property is invaluable, as your comfort is one asset that always generates a return. If you're a remote worker or have a home-based side hustle, the benefits of customizing your living and work space compound drastically.
Another hidden benefit? Homeowners report "excellent or very good" health at a rate almost twice that of renters. Health and longevity is another investment in yourself and your lifestyle that's difficult to quantify but provides an immediate and long-term ROI.
Why You Might Not Think of a House as an Investment
Of course, in some circumstances, buying a house is a bad investment. If you don’t have a stable financial cushion, including emergency savings, you could quickly find yourself underwater between mortgage payments, upkeep costs, and other expenses renters can offload to a landlord. Today, mortgage rates hover around 7.5% - the highest in two decades. At the same time, many think we're on the verge of a real estate market correction that could reduce your home's worth post-purchase, making an investment in buying a house a losing proposition in the short term.
Before pulling the trigger on buying a house, ensure you understand the full financial implications of the process.
High Closing Costs
When you buy a house, many unexpected fees are tacked onto the transaction. These are called closing costs and include fees to the many parties involved, like title companies, your lender, inspectors, and more. You may also have to pay homeowner's association dues, mortgage insurance, and flood monitoring costs if your home is in a risky area.
Closing costs average 3% - 6% of the home’s value. For a median-priced home you buy for $416,000, that adds up to as much as $25,000. That’s a huge chunk of change on top of your down payment, renovation plans, and moving expenses. Sometimes, you can negotiate for the seller to cover a portion of closing costs – but don’t count on it.
When you rent, your landlord will typically handle all the costs associated with the property. Costs range from minimal when patching drywall to substantial if you need to replace an air conditioning unit or water heater. When buying a home, a good rule of thumb is to allocate 1% of the home’s value for immediate repairs and maintenance. You should expect to pay 1% annually for maintenance, but that fairly slim figure can balloon if you buy an older home needing repair.
Before buying a home, ensure your inspector is diligent and thorough so you can understand how much you should expect to spend on renovations or repairs. At the same time, try to maintain 1% of your home's value in a repair/maintenance account to cover costs as they arise.
Without active maintenance and renovations, your property will depreciate over time (fall in value). If the real estate market is in a slump, or you can't afford the upkeep, depreciation may quickly outpace the home's sale value in the short term. Our mortgage calculator makes ballparking expected depreciation easy.
Timing the Market Can be Difficult
As we've covered multiple times, we're in a weird place regarding the real estate market. Supply is strained, but demand is also falling. At the same time, high-interest rates and elevated property values make timing the real estate market difficult. If you buy a home today and the market collapses in a few months, you could become underwater on the home loan (owe more than it's worth). Although property values rise over a sufficiently long timeline, assuming good upkeep, if you're in a pinch, you may not be able to sell the home for its original value quickly in a down market. Timing the market is often a losing proposition, so ensure you're financially prepared to face the worst-case scenario before buying a house.
Investing in home ownership can be one of the most life-changing paths to travel. When you buy a home, you unlock financial opportunities that are otherwise difficult to come by, including rapid asset appreciation, tax benefits, and long-term savings compared to renting. With that in mind, it’s hard to argue with the 95% of homeowners and 72% of renters who think buying a house is better than renting.
But, at the same time, buying a house comes with hidden costs and dangers. High closing costs and maintenance expenses can eat into your budget and savings, and there's a substantial risk of buying a home in today's strained economic environment. If you can't definitely and comfortably afford a home, stretching your finances and budget to make it work probably isn’t a good idea.
Still, homeownership confers two critical benefits: the comfort and stability of modifying your living space and knowing it's yours, and building generational wealth in a way that’s not easy otherwise. If you can afford to do so, investing in yourself and your family through home ownership is the right move.
Is owning a house a good investment?
No investment is guaranteed, but over the long term, property values typically trend upward. Short-term market fluctuations add significant risk, so ensure you conduct due diligence on the market, economy, and your own financial situation before buying a house.
Is buying a house a tax write-off?
You can write off some expenses associated with home ownership, like mortgage interest and some closing costs. Tax law and real estate are tough terrain to navigate, so consulting with a qualified tax professional is best if you're considering whether to invest in a house.