Rate of Return on Houses as Investments

Prior to The Great Recession, houses were a great investment. From 1964 to 2009, the average growth rate of housing prices was 5.4% (Freddie Mac). In order to fully understand the rate of return on home ownership, we need to analyze how leverage (that is, borrowing part of your investment capital) impacts your investment. Let’s say you buy a home at $230,000, the median national (Zillow, 2019). You then put down 20% of this, or $46,000. The return must be calculated on your actual cash investment of $46,000 and not the total house price. If the house goes up in value by 10%, it is now worth $253,000 for an increase of $23,000. If you had not taken out a mortgage but paid all cash for the home, your return on investment would have been 10%. However, since you only invested $46,000 cash into the home, your return on investment is: $23,000/$46,000 = 50%. Note, however, that I did not take into account the transaction costs of buying and selling the home and all the costs while owning it.