Why Your House is a Terrible Investment

If you want to completely absolve yourself of refinancing your home and dumping all your cash into kitchen or bathroom re-model, all you have to do is whisper two magic words.

Resale value.

The moment a homeowner decides they are tired of their outdated cabinets and want a $50,000 kitchen remodel, the mental gymnastics begin. We convince ourselves that we aren’t blowing a massive chunk of our savings on a luxury good; we are making a prudent, strategic “investment” in our property.

I call this Consumption Camouflage.

We disguise our desire for nicer things in the camouflage of a financial ‘investment’ to make the spending feel responsible.

First, let’s acknowledge reality. For anyone trying to navigate the housing market today, simply getting the keys to a house is a massive financial hurdle. For those fortunate enough to actually own property and have surplus cash to upgrade it, you are already in a position of privilege.

But if you are continuously sinking your surplus cash into renovations under the guise of funding your retirement, eventually the bill will come due.

The Century of Data

Why do we believe our houses are magical wealth-building machines?

Because we only pay attention to short-term, localized housing booms, and completely ignore the historical baseline.

If you want to see what housing actually does over the long haul, you have to look at the work of Nobel Laureate Robert Shiller. Shiller tracked residential real estate prices in the United States spanning more than a century.

The data is incredibly sobering for anyone treating their house like a retirement fund.

Over a 100-year timeline, residential real estate historically appreciates just a tiny fraction above the rate of inflation. Once you factor in property taxes, maintenance, interest on your mortgage, and the inevitable costs of keeping a house standing, a primary residence's expected ROI is closer to break-even than an asset that will substantially expand your wealth.

The Math of the Remodel

This is a concept I dive into heavily in The Rational Investor, you have to separate what you consume from what you invest. And as I discuss in more detail in the book, this is very hard to do with your house, because it is both an investment and a consumption good.

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