The current 30 year T-Bill yield is 4.5% (http://www.bloomberg.com/markets/rates/index.html). If you can get the same return as a 30 year US government bond and have the security of living in the same home for 30 years you can’t be that far off of a decent investment. My point is to highlight that diversification of your net worth across different investment classes is a prudent thing, as can now be demonstrated with the stock market losing 40%+ of its value in under one year.

I saved this article 3 years ago (when the real estate market was still booming) and still read it from time to time. http://tiny.cc/39hg7

It’s fitting for this discussion.

My home is shelter, it’s not an investment. It will only become an investment when I decide to sell it, rent a place to live and invest the proceeds from the house in the stock market.

A few real estate professionals and lenders can be blamed for part of the problem. In the 1970s, there was a research study that concluded a home is the biggest asset for most retirees. A few lenders and agents spun the study into marketing material with the message buy a home as an investment for retirement. The second study from the 1990s concluded homeowners are wealthier than renters. The report mentioned that disciplined renters could be just as well off or better from investing the differential cash flows. Decisions carry an opportunity cost. A few lenders and agents spun the study into marketing material with the message invest in your home for retirement because renting is waste of money.

A few lender and agent marketing machines continue to quote both studies out of context while forgetting relevant information from the studies. Lenders are famous for using the rent vs buy calculator and talking about the tax benefits of the interest deduction. About 99% of the calculators I run across are flawed. They fail to account for all the necessary cash flows, opportunity costs, tax implications, etc. Many homeowners do not itemize their deductions, so there is no tax benefit from the interest deduction.

America is a society of consumerism. They bought into the “your home is an investment” for retirement garbage. Instead of saving the equity for retirement most Americans refinanced and spent the equity on cars, trips, gadgets, over priced single family home rentals, etc from 2005-2006.

Any agent or lender who says a home is an investment doesn’t understand basic finance, economics, and discounted cash flows analysis. Owning a home is a choice to own shelter instead of renting shelter. A home is not an investment grade asset. Over a lifetime of home ownership the after tax return on capital amounts to about 4%-5%.