Wondering what income you'll need to buy a median-priced home? See our latest metropolitan area home affordability analysis

Wondering what income you'll need to buy a median-priced home? See our latest metropolitan area home affordability analysis

Should I consider my home an “asset”?

The answer is "yes", or even "maybe" or "it can be", usually modified by "but not right away, if ever."

Owning a home (most especially if you buy one using a mortgage, as most do) can be a funny thing. Financially, it starts out as a liability but eventually turns into an asset, provided things work out in your favor. However, it usually becomes an asset slowly, over time, but has fairly high fixed “carry” costs (property taxes, maintenance, etc.) that other "assets" (stocks, bonds, metals) do not have.

To start with, residential real estate can be expensive to get into, given up-front transaction costs for a mortgage that can run thousands of dollars.

Then, there's interest cost. Most borrowers don't realize that when they buy their home they will likely be paying 30 to 50 percent above the agreed-upon price when all is said and done and they own their home free and clear.

For example, a $200,000 home purchased with 10 percent down ($180,000 mortgage) and a 30-year fixed-rate mortgage at 4 percent will see total interest over 30 years of almost $130,000... so in one way of thinking, the total cost of that home wasn't $200,000 but rather $330,000. Of course, most buyers don't stay in one home or mortgage for a full 30 years, but there would be pro-rated interest costs over any period. You can see costs for any anticipated time period using our amortization calculator.

Then there are property tax and maintenance costs to consider. Even as you are building some asset strength via the retirement of the outstanding principal balance (starting at about 1 percent in the first year and expanding slowly over time) your fixed costs may be well above this, especially in the early years of the loan. If, in a year’s time, it costs you two percent of the value of the home (or more) in outlays to increase your asset (equity) by one percent or so, have you gained or lost? Of course, over time, this ratio will change; later in your mortgage, you'll likely be paying down the outstanding balance at a rate that will likely exceed your routine carry costs.

There are two facets of residential real estate that can produce value. First, it is among the only opportunities for the average person to purchase an asset on "margin"; that is, using only a relatively small amount of your own money (as little as 3 percent), you are allowed to leverage an asset worth many, many times your investment.

Second, and despite periodic booms and busts (of the local, regional and even national variety) prices for homes usually creep higher over time. Buy before a boom, and a string of strong price gains can reap considerable returns; homeowners who bought homes in 2011 or 2012 are experiencing this right now, with several years of outsized price increases averaging close to 5 percent annually (more or less).

If you bought a home for $100,000 in 2011 you will likely have paid down about 14 percent of the outstanding mortgage by the end of your seventh year. However, as you bought at a time when prices are rising quickly, the value of the home has compounded by about 5 percent per year, and is now worth about $134,000; this strong appreciation may have covered all of your inbound and carry costs and even put you a little ahead! Of course, the inverse was true for folks who bought at last-decade peaks in 2006-2007, when even making payments failed to produce equity until values began to recover.

Prices may rise or fall (or both) over a given period of homeownership, and gains in value are not a sure thing. In fact, long-range studies by economist Robert J. Shiller show that, once adjusted for inflation, home prices are essentially flat over the long run (1900-2015 or so).

Even if equity gains do happen, however, you can't easily realize any you manage to receive. These can only be captured by selling the home or by taking on a new loan (either via a cash-out refinance or home equity product) -- and both of those have costs that will erode your gains. Selling the asset can carry considerable costs, too -- up to 6 percent of the value and more is commonplace -- and will also erase some or even all of any gains.

Still think it's an asset?

The above is intended to help frame your thoughts. When buying a home, it's usually best to first focus on how well it meets your family's needs and lifestyle, where it is located in relation to things that are important to you or your family and the likelihood that it may be sustainably affordable. A house is a place to live, first and foremost, and its value as an asset, while valuable for many things both near-term and far, should be a secondary consideration.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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