When the real estate market gets hot, speculators like to jump into the scene. But what about the rest of us average homebuyers?

The American dream has always included owning your own home. Many have also suggested that owning your own home can be a good investment.

So how good of an investment is home ownership?

Pretty good, but not in the way you might think.

Buying A Home As An Investment

First off, we’re not talking about renting or house flipping.

There are plenty of people who like to gamble on short-term real estate deals. There’re also many who like to park their money in rental property. That’s fine for them, but what we’re talking about now, is your personal home.

With interest rates threatening to rise above historical lows, and rise they will, many people are wondering if buying a home now is the right choice. We build 55+ communities for active adults in Utah, so we experience first-hand the temperature of the home buying market. Currently the real estate market is hot.

Because it is hot, market prices feel high. This may lead a lot of people to consider whether or not now is the right time to buy a home.

How much will my home appreciate in value?

For rental properties, the MACRS method of accounting suggests that a property has a useful life of 27.5 year. Many modern homes are habitable for much longer than that. I’ve heard estimates up to 100 years. For now, let’s just assume that a house is fully depreciated at 50 years.

That would suggest that any time between 50 and 100 years old, a house becomes less and less valuable. However, in Utah at least, the ground that the house sits on generally becomes more valuable.

This is because of the availability of water and the fact that most of Utah’s prime real estate is sandwiched between two mountain ranges. The means that while Utah’s population keeps growing, good real estate keeps shrinking.

Basic supply and demand pushes the price of land up faster than inflation.

Inevitably, your home price will go up…

But while the price of your home goes up, it will eventually be worth no more than the dirt it sits on. You’ll know this, because while you can get more out of your house than you originally paid for it, lot prices will be going for about the same price as your house is worth now.

This is time for somebody to buy your quaint cottage and bulldozes it to put a new house in its place. Though in practice, this isn’t as cut and dry as that.

So, let’s assume that your property keeps going up in value:

Was the investment worth the purchase? That depends.

Financially speaking, no. At least, not usually. Even if you do get a mortgage at 3.75%, the magic goal for inflation is closer to 2%. Unless you pay for your house in cash, time the market perfectly, or pay off your house in only a couple years, you’re likely to pay $166,800 interest alone on a 30 year mortgage, bringing your total house cost to $416,800.

Consider that your house will only appreciate to $452,800, that means that you gain only 0.28% on your investment each year. Of course I’m simplifying this a little, because I’m not taking into account the inflationary principles effecting your later payments and the true APR of your loan. But financially speaking, there are a lot better ways to earn money from an investment.

And if you’re only increasing your investment by .28% each year, just imagine what will happen when that slim margin is whittled away by higher mortgage rates.

But if that’s the case, why by buy at all?

Owning a home has more benefits than a simple financial calculation. In fact, renting is still a heavy burden, more so in some cases. So while a home may not be the best long-term financial investment, it is a good personal investment.

A home is an investment in a way of life that is hopefully more rewarding than a few spent dollars. After all, money can be measured. A quality lifestyle is priceless.