It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

Should I consider my home an "asset"?

Keith Gumbinger

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. Other assets you can buy may or may not have minimum investment requirements, but few have up-front fees.

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 $250,000 home purchased with 10 percent down ($225,000 mortgage) and a 30-year fixed-rate mortgage at 3 percent will see total interest over 30 years of over $116,000... so in one way of thinking, the total cost of that home wasn't $250,000 but rather $371,000. 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 of time, and interest costs are highest in the early years of ownership. 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 2 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 tax and maintenance outlays to increase your asset (equity) by two 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, growing your asset more quickly.

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 experienced this for the first few years, and certainly that's the case with folks who bought homes in 2017 to 2020, as there have been several years of outsized price increases averaging close to 6 percent annually and recently, some double-digit annual gains.

If you bought a $220,000 home with a mortgage of $200,000 in April 2011 you will likely have paid down about 20 percent of the outstanding mortgage by the end of your eleventh year. However, as you bought your home at a time when prices were at bottom and you fortunately owned your home during a period when home values were rising quickly, the value of the home has compounded by an average of about 6 percent per year (if your specific piece of real estate appreciated at about the national rate). If this occurred, your house could be worth as much as $391,500 today, and this strong appreciation may have covered all of your upfront and routine carry costs and even put you well ahead!

Of course, the inverse was true for folks who bought at last-decade peaks in 2006-2007, when even making regular payments failed to produce equity until home values finally and fully recovered over the last few years in most areas. Even then, not everyone has been made whole by the vagaries of the market and by making regular mortgage payments; some 2.6 million properties (about 4.7% of all homes with a mortgage) remained "underwater" in the first quarter of 2021, according to Attom Data Solutions. As well, there's also no way to know if lofty home values of today will retreat in the future, either.

Related: Track home values with our Home Value Estimator

Prices may rise or fall (or do both) over a given time 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). Because there are both upfront, routine carry and exit costs, your house may not turn out to be an asset at all if you aren't in the home long enough for appreciation and paying off what you owe to cover these costs.

For example, you bought the same home as above in 2011 for $220,000. Home values were about flat over the next year (a decline of less than a percentage point, actually), then rose by 8.9% in the 2012-2013 year. The home is worth $238,092 at this point, and you decide to sell. You're looking at an $18,000 gain, right? Well, if you subtract from this $18,000 the closing costs of your loan (call it perhaps $6,600 -- 3% of the purchase price), and then total up your expenditures on home-related items you can't take with you (paint/carpet/landscaping whatever) and figure this at maybe 2% of the value of the home ($4,761), and factor in a sales commission of 6% of the selling price $14,286), the math says the combined costs of your sales commission, maintenance/improvement and inbound closing costs leaves you at $212,445 -- so owning this "asset" for two years cost you about $7,500. That said, you did pay off about $6,600 of your loan, so your net loss is only about $900. In this case, your "asset" actually cost you money over the time you owned it.

Even if you are there for a longer period and solid 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 fees and interest costs that will erode your gains. As well, there's also no guarantee that someone will want to make you such a loan either, and these avenues may open and close as economic and market conditions change. As we noted, 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. After all, your "asset" may turn out to be a liability.

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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