Housing Gone Wild

Joe Kesler

THERE’S SOMETHING very emotional about our homes—and how we think about their value. Take the conversation my wife and I had a couple of weeks ago.

“Did you see the house behind us went up for sale this week? They have it listed at 141% more than what we paid for our house.”

“Well, there’s no way their house is worth that much.”

“Oh really? I just talked to our neighbor—the one who’s a realtor—and he said they had five offers the first day it went up. It sold for more than the list price within 12 hours.”

“Wow, our house is much nicer than theirs. I wonder how much we could get.”

For many homeowners, the next step is to visit Zillow to get an estimate of their home’s worth. While I know the limitations of Zillow, I did just that. Sure enough, Zillow estimates our house is worth far more than we’d have guessed.

I follow the Montana property market closely and things are crazy here. We have minimal COVID-19 problems and we’re seeing lots of migration from the West Coast. The chance to enjoy Montana’s quality of life, while keeping a high-paid job working from home, is driving up real estate prices. Bozeman, for example, has seen the median house price jump from $435,000 to $575,000 in the last year, a 32% increase.

The boom appears to be everywhere. Redfin recently put out a report that shows home prices are at an all-time high, up 17% from last year. Thinking about building instead of buying? CNBC says softwood lumber prices are up 112% compared to a year ago.

These types of reports get everyone’s attention. Our home isn’t priced every day, like stocks and bonds are. When we suddenly realize the value is much higher than we thought, we can lose perspective. Want to think rationally about housing? Keep these six ideas in mind.

First, those who boast about their home price gains are often just bad accountants. Closing costs, homeowner’s insurance, real estate taxes and maintenance are just some of the expenses that non-accountants might forget to include when estimating their gain. Then there are those costly home improvements. Did the boastful neighbors add that $50,000 kitchen remodeling to their cost?

On top of that, how much of the estimated profit would disappear once inflation was factored in? According to the Bureau of Labor Statistics, housing prices have climbed 4.1% a year since 1967, barely above the 3.9% inflation rate.

Second, ponder how housing has performed compared to other investments. For the same period we’ve lived in our house, I calculated the return for one of our Vanguard Group funds, a small-cap growth ETF (symbol: VBK). While I’m moved emotionally when I realize how much our home has appreciated, I hardly ever think about the far larger 400%-plus rise in the Vanguard fund. To think clearly about our house as an investment requires us to dial down the emotion and view it in the context of other investments.

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Third, while housing hasn’t historically been a great investment compared to alternatives, it is a great forced savings vehicle. With every monthly mortgage payment and every tick higher in property prices, we have more home equity. That gives us options in retirement. In fact, for most older Americans, home equity is the biggest single asset they own. Below are some Census Bureau statistics that were published last year by They show average home equity by age:

  • Those ages 65 to 69 have $136,670 in home equity, totaling 61% of their net worth.
  • Those 70 to 74 have $153,300 in home equity, totaling 72% of their net worth.
  • Those 75 and older have $149,860 in home equity, totaling 75% of their net worth.

For middle class families, home equity—along with Social Security—looks to be essential for a comfortable retirement. There’s a variety of ways to tap into this equity, including downsizing, reverse mortgages or a traditional home equity loan. Problem is, many of these methods are expensive or cumbersome. I hope disruptive technology companies will come along and make extracting home equity cheaper and easier.

Fourth, with the politicians spending money without any fiscal restraint, I like having an investment in real estate to mitigate the risk of rapid inflation. If the Federal Reserve misjudges monetary policy and inflation comes roaring back, home prices should keep pace, plus rapid inflation would reduce the real cost of servicing mortgage debt.

Fifth, there are many non-financial reasons to own a house. It’s been described as the American dream. In fact, part of my time is spent working on affordable housing issues for financial institutions. It’s satisfying work—helping others to feel more connected to their community thanks to homeownership.

Finally, never forget the biggest payoff from owning a house: You get a place to live. Think of it as renting to yourself. If you had to rent the house you own, you might need to make annual rent payments equal to 6% to 8% of its value. A Zillow article even suggests a fair rent might be as much as 12% of a home’s value. My advice: Look at your housing costs as you would any other consumption expense. The investment gain and the forced savings are secondary considerations.

Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe’s previous articles.

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1 year ago

My current home was purchased in early 1980 for just under $100k. It might be worth $750k or so today. Over the years I have reroofed a couple of time, replaced the windows, garage doors, heaters, water heaters, water line, carpets, window coverings, painted four times, fixed the chimney, the drainage, wooden decks, appliances, redone the bathrooms, reinsulated, added AC and fixed many other things that I’m sure I have forgotten. I paid the mortgage off in 1994. My property taxes have changed from $900 to over $6k today. When I eventually sell the place, I’ll have to pay capital gains tax on part of the sales price. We live in a great school district. We have an HOA that takes great care of our common areas and makes people take care of their homes and yards. The developer took care to leave a lot of the trees, so it is a beautiful area.

Owning a home isn’t inexpensive. It isn’t an investment. It is a lifestyle choice.

Joe Kesler
Joe Kesler
1 year ago

That’s a good position to be in Dave. Still, for most of us I think, the mystery of not having a stock ticker to look up to tell us the value of our house makes it intriguing to talk about.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Excellent write up.

We were extraordinarily lucky with our first purchase in California, just outside the bay area. After factoring in mortgage payment, property taxes, utilities, insurance, maintenance, improvements, lack of rental payments, and agent fees, I estimate the 10 year IRR on the property at 20.9%. I transferred to a different part of the country, so not only did we buy at the low of the housing recession, but we sold near the height of last decade’s frenzy, all dumb luck. Life-changing luck. Maybe it was a karmic trade for the loss of most of my (eventual) pension. “Shrug”.

Our second house experience was much more normal. For the first 12 or 13 years, the IRR came out to right around 0%. Only in the last few years has it turned slightly positive (assuming a sale at 90% of the avg big 3 price estimates – Zillow, Realtor, and Redfin.)

What we really got out of this latter house was an incredibly supportive school district for our special needs son, and I just can’t put a value on that. We’ve also enjoyed hosting many exchange students, as well as helping out family with a place they could stay for extended periods when they hit difficult times, especially during this recent pandemic.

Also, my parents have been retired for over 20 years, but now my mom may need to rely on the home equity. Their savings and income are enough to support her for at least 10 more years. Tapping the equity of the house should extend that to 30 more years should she live well into her hundreds. I’m looking into how we prepare now, leaning towards a HECM-LOC, but still researching. I know she is too attached to ever leave the house, so if I need to hire live-in help for her, well, I’m saving for that as well.

Joe Kesler
Joe Kesler
1 year ago

That’s a great story Roboticus of your adventures in real estate. People rarely live somewhere for the house investment. As your story shows, our careers usually dictates and we get the good or bad luck that comes with it. Love your honesty and humility that the home run you hit in California wasn’t rare investment insight. But I’m sure it’s a fun story to tell to others who have never been in that kind of overheated market.

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