Let’s go through a simple example:
The McCormick’s buy a house in Florida in 2001 for $200,000 and five years later it’s up by 80% to $360,000.
In 2007 the price falls by 10% to $324,000 and another 10% in 2008 to $291,600. Since after tax benefits, their
monthly cash outlay of ownership is comparable to what it would cost them to rent the same home, we’ll con-
sider that a wash. They made a 20% down payment of $40,000 and with the value increase of $91,600 they have
more than doubled their money in 7 years. Since this is a non-taxable gain below the current exclusion, an alter-
native investment would have to earn 11.9% tax free to equal that rate of return. Without assuming undue risk,
precious few investments measure up to that return.
Using the Housing Price Index from OFHEO (the Office of Federal Housing Enterprise Oversight) since 1975,
U.S. appreciation has averaged just below 6%. If we add the benefits of ownership (rental or housing value,
appreciation and tax savings) then subtract the carrying costs (interest, taxes, maintenance and insurance) we
clearly see that owning a home doesn’t actually cost money, it earns it.
The Down Side
While the above example shows how powerful real estate can be as an investment – and the bigger the invest-
ment, the bigger the potential return – no one should be day trading houses. Ownership is more appropriate to
the long term as over time, values have increased with comparatively little volatility. Ownership can also provide
tax-deferred, if not tax-free, returns and it has intrinsic value that surpasses that of almost any other investment.
That is to say that even if it were possible for the market value to go to zero like a share of stock in a bankrupt
company, you can still live there or rent it. Since both of these have value, it’s impossible for it to really ever be-
come worthless. How often can you say the same of other investments?
Over time, incomes rise to enhance affordability. Historically, home prices have outpaced inflation and that cre-
ates a valuable hedge and a core holding that performs as proper investments should.
Putting affordability in perspective wouldn’t be complete if we didn’t also recognize the wealth-building char-
acteristics of owning as one of the greatest contributors to net worth. In other words, owning has traditionally
been one of the best contributors to personal bottom
lines and in real terms, this is a whole other source
of income. This begs the final question – can we
afford to buy or can we afford not to?
Author: Brian T. Larrabee is a 28-year vet-
eran of the housing market. Owner, inves-
tor, builder, banker, speaker, author and
Founder of Estate Of Mind, Inc., the
publisher of The Home Econom-
ics Chart, The Visual Guide to the
Housing Market.
www.coloradohomeownermag.com www.coloradohomeownermag.com
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