Home ROI? Home Ownership vs. Market Investing by Ken Jacobson, CMPS
There has been a great deal of speculation and comparison between real estate investing and stock market investing. Recently there have been some pundits that have advocated renting because it is cheaper than buying and, therefore, invest your money in other investments.
According to the “Motley Fool” article written by Bill Barker and published 04/22/2016 the nominal rate of return in the stock market has been 9.69% for dollars invested over the past 50 years. But, let’s not forget about inflation. According to his article the Annualized Real Return (Adjusted for inflation) is actually 5.38% Now we all know that the stock market has been on a tear the last few years. We also know, or should know, that a correction and/or bear market may be on the horizon. According to Dana Anspach in her article negative stock market returns occur, on average, one out of every four years. You will see the positive years far outweigh the negative years. No one knows ahead of time when those negative stock market returns are going to occur.
I defer to your financial advisor and/or CPA to help you determine how and what you should invest in. My purpose is to show you another aspect of how to evaluate a home purchase.
>Let’s talk about the Greater Houston (Houston) 1-4 family residential market. The appreciation in Houston has averaged approximately 3.23% historically. The most recent year over year return ending October 2017 for Houston was an increase of 3.1% according to CoreLogic. That placed Houston 10th in the nation on home price appreciation.
Since 1990 there has been a downturn in prices from 1993 to 1994, 1994 to 1995 and once again from 2008 to 2009. The variables are many including price ranges of houses sold (low end, high end, location, etc.), but this is the most recent information that I’ve found available. It comes from The Texas A&M Real Estate Center. So, based on this information from A&M, over the last 26 years, we’ve only experienced 3 down years – not bad.
Most of the media say that the price increase, being 3.10% or 3.23% equates to your return. But most people, when they make an investment evaluate their return based on cash invested basis – what kind of return did my (say $50K) make me.
Let’s take the same $50K we were investing in another investment (stock market, etc.) and buy a home and see what our return on dollars invested reveals
Purchase price of $500,000, down payment 10% and closing costs of $3,700. I used a 9 year evaluation period.
This information is deemed reliable but is not guaranteed. It is intended as an example only. All figures are estimates and are subject to change without notice. Not all applicants will qualify. Not all programs available for all scenarios. Hometrust is an equal opportunity lender.