Today I saw another sponsored “news” story on the Internet touting homes as a great investment. This kind of thinking infuriates me because it leads so many people to play around with their homes, often to their loss.
A Home Is Not an Investment. An investment is an allocation of a financial asset for the purpose of making a gain. A home is one of the three basic necessities: food, water and shelter. Think of it this way. Imagine a family reduced to living outdoors, cooking over an open campfire, huddling under trees or logs at night. They finally find a cave. They are not thinking how that cave is going to appreciate in value and how much money they’ll make when they sell it. Instead they’re thinking how they now have protection against the wind and rain and animals with sharp teeth and claws. They’re thinking they have a place to eat their meals in comfort (compared to hunkering n the rain).
A House Can Be an Investment. A house, on the other hand, can be an investment. The difference between a house and a home is that you live in a home; a house is a place for someone other than you to live. If you’re looking at residential housing as an investment, that’s far different than looking at your home as an investment. Way back in the Dark Ages, around 2005, at the height of the housing boom, people forgot this crucial difference. Housing values were going up so fast that millions of people were suckered into “tapping the equity” in their homes. In other words, they took out second and even third mortgages and used that money for whatever: a two week cruise, a new motor home, to play the stock market — it didn’t matter because next year the house would be worth twice as much and you could sell it and pay off the mortgages. It was a great strategy until housing prices took a nosedive. All of a sudden these homeowners were under water with their mortgages and the banks were foreclosing. Here we are a dozen years later, the housing market has rebounded, and people are starting to talk about your home being a great investment. Don’t fall into that trap. A home is not an investment. Say it with me, A HOME IS NOT AN INVESTMENT.