MY 95-YEAR-OLD mother recently asked my brother and me what information we could get on our cellphones. While showing her the many possibilities, we went to Zillow, so she could see the information that the site has about the house that my wife and I own.
Zillow estimates that the house is currently worth $336,700, and said that we purchased it in 1986 for $86,700. My brother, who is much smarter than me, did some quick mental math using the rule of 72, and said, “Boy, that’s less than a 4% annual return.”
Plugging the actual numbers into a spreadsheet, the return has been 3.8% a year. How am I supposed to feel about that?
There are several ways to look at the question. A dollar in 1986 had the purchasing power of $2.70 today, so—adjusting for inflation—our $86,700 home purchase would cost $234,000 in today’s dollars. Zillow thinks we could sell the house for more. That means the house has beaten inflation. Perhaps I should feel good.
On the flip side, the S&P 500-index rose from 235 in 1986 to 4,228 at yesterday’s close. Had we invested our $86,700 in the S&P 500, the money would be worth almost $1.6 million—considerably more than our home is currently worth. Maybe I should feel sad. Of course, nobody would have loaned us $75,000—our initial mortgage amount—to plow into the stock market. Even if a lender had, our “equity” would have been wiped out during the October 1987 market crash and we would have received a margin call.
The house didn’t just cost the purchase price. In the years since our 1986 purchase, we’ve paid $71,760 in property taxes and $50,469 in mortgage interest. Spending 15 minutes looking through my files, I identified another $38,811 of home improvements that we’ve made, things like replacing the windows and upgrading the floors. That, coupled with the initial purchase price, brings our total housing cost to $247,740. That means that we’re ahead by about $89,000.
This list doesn’t include the cost of the deck we added, the gallons of paint purchased, the landscaping we’ve done, the new shed or the thousands of dollars that we are about to spend remodeling the kitchen. At best, we would be lucky to break even if we sold our house. I’m back to feeling sad.
Economist tell us that, on average, housing appreciates in line with inflation, and that the real value of the house is the imputed rent—the value you get by living in the place—or the money you save by not paying rent to others.
I don’t have good numbers on how much we might have spent on rent. But I know that we had been renting an apartment for $850 a month when we moved into the house. Zillow says that today we could rent our house for $1,724 a month. Assuming a linear increase in rent over that time, we would have paid $571,428 in rent over the past 36 years.
When I calculate our net worth, I do get to show a house with a value of $336,700. That means the house has saved us $570,000 or so in rent, plus it puts a $336,700 asset on our household balance sheet. Offsetting that is the $247,740 in housing costs that we’ve incurred. Still, owning has proven to be a much better deal than renting. Now, I’m feeling better about the house.
Of course, this is just the monetary value of our home. A significant added bonus: It’s also a place that protected us from storms and cold, where we celebrated holidays and birthdays, and raised two terrific men. Whether I look at the house as just breaking even or making us a heap of money, I’m satisfied with the value we’ve received.
Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon’s brother Larry also writes for HumbleDollar. Check our Kenyon’s earlier articles.