Do The Math: A Mortgaged House As An Investment

There are those that believe that a mortgaged house serves as a high-yield investment vehicle. Even though housing prices in some places increased at over 10% per year during the Reagan-era housing boom and again during the dot-com boom, I personally find this idea hard to accept.

An Office of Federal Housing Enterprise Oversight (OFHEO) report on housing prices shows that housing prices increased 8.8% since the first quarter of 2000. But according to a July 22, 2001 article in the Arizona Republic, OFHEO issued an independent report stating that U.S. housing prices rose at an average of just 4.5% per year between 1980 and the first quarter of 2001. The US Department of Housing and Urban development places this number at about 4.5%-4.6% from 1985 to the second quarter of 2000 (you can find tables and graphs of past and projected house price inflation values in a report at http://www.hud.gov/fha/comp/rpts/actr/2000appf.pdf). So while housing may appreciate nicely in some years, the overall long-term appreciation rate is low.

With shifting demographics and jobs moving between areas, I don't believe it's reasonable to count on appreciation in housing prices in any specific area as a high-yield investment vehicle. If you have a 7% APR mortgage and housing appreciates at a long-term average of 4.5% per year, you're paying 2.5% more each year than the average house is likely to appreciate. A house can provide long-term wealth and security, but you won't get rich on it unless you are very, very lucky. After the Reagan-era housing boom, there were many people stuck owing mortgages that were larger than the market value of their houses.

Whether you agree or not, think about it anyway.

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