Should I Invest in the Stock Market or a Home?

When people think about saving for their future, they rarely consider their home as an investment option. Financial services companies have long recommended mutual funds, stocks, bonds, and other financial instruments as ideal options for investing for the long term. But as we have recently witnessed, these can be subject to significant devaluation losing as much as 30% of their value in a matter of months. On the other hand, homeownership in the Capital Region is something that shouldn’t be overlooked as an investment option. Over the long term it has held its value while still offering tax and shelter benefits.

The Power of Leveraging

Leveraging is one advantage of homeownership. A buyer can purchase a home and receive the full benefit of homeownership with a cash down payment that is only a fraction—as little as 5 percent or less—of the total purchase price. This is called leveraging, and it makes the rate of return on a home purchase much greater than on another investment with the same value where the buyer must put up the entire purchase price.

For example, if a buyer makes a down payment of $15,000 on a $200,000 home and the home’s value increases to $205,000 over time, then the home owner’s equity (the value of the home minus mortgage debt) has increased from $15,000 to $20,000, approximately a 33 percent increase.

Uncle Sam Takes Less

Unique tax benefits that apply only to housing also help lower the cost of home ownership. Both mortgage interest and property taxes of owner-occupied homes are deductible. Moreover, profits of up to $500,000 on the sale of a principal residence (or $250,000 for a single owner) are excluded from capital gains taxes. This means not only does a home have the potential to earn a greater return, but it also has additional tax benefits. Stocks and Bonds offer no such benefits.

You Can Live in It!

In addition to the positive financial aspects of homeownership, a home cannot be valued in monetary terms alone because it is so much more than just an investment. Not only can homeownership be a stepping stone to greater financial security, it provides a permanent place to call home and great personal satisfaction. The reality is, you need to live somewhere, so it might as well be in an investment for your future. Try living in your stock portfolio.

Historical Stock Market vs. Housing Comparison

The following table illustrates a $10,000 investment in either the stock market or a home using modest historical appreciation rates for each class of investment. The power of leveraging allows a $10,000 down payment on a home to purchase $200,000 of equity to appreciate. As with any hypothetical comparison this is for illustrative purposes only and you should consult a financial and tax professional or Realtor® to see if this example would be true in your unique situation.

Year	10,000 Initial Investment in the Stock Market at a 7% Annual Return	$10,000 Down payment on a $200,000 Home at a 3% Annual Return
Purchase Price	$10,000	$200,000
1	$10,700	$206,000
2	$11,449	$212,180
3	$12,250	$218,545
4	$13,108	$225,102
5	$14,026	$231,855
6	$15,007	$238,810
7	$16,058	$245,975
8	$17,182	$253,354
9	$18,385	$260,955
10	$19,672	$268,783
Purchase Price	-$10,000	-$200,000
Profit	$9,672	$68,783
28% Tax	-$2,708	None
Final Gain	$6,963	$68,783

Please note this chart uses the following assumptions:

• If investing in the stock market you are renting
• You have a 5% down mortgage
• Your monthly mortgage & rent payment are the same after the mortgage interest & property tax deductions
• You liquidate both investments at the end of 10 years
• The stock market performs at a 7% annual return
• Home values increase at a 3% annual return