Investing Your Money | Home Down Payment or Stocks?
Question: Five years ago, it you had some money to invest, would you have been better off turning it into a down payment on a house or into the stock market?
Answer: Colorado housing market trumps the S&P 500 Index.
The sizzling Colorado real estate market has paid big dividends for homeowners and investors with red hot home appreciation marks, according to the Federal Housing and Finance Authority. In their recent housing report, Colorado ranked 16th in the nation one-year change in housing price (6.74% increase) and a whopping 56.56% increase over the last five years.
Only Nevada (65.91%) and Washington (58.91) posted higher increases from years 2013-2018.
During that same time period (Dec. 2013-Dec. 2018), the S&P 500 Index started at 1841.07 and ended at 2506.85, a 36% increase.
Granted, when it comes to real estate, not every house is created equal. Nor are stocks.
When evaluating housing appreciation, one can typically expect average annual increases around 5%. This figure takes into consideration good and bad years, and typically you will see the Fed control this with interest rate adjustments. Currently, the U.S. average is posting a 5.73% increase annually in home appreciation.
The Denver market has had huge increases in the value of single family homes. According to data from the Denver Metro Association of Realtors, representing the 11 Denver metro counties, the area has seen the median price of single family homes increase from $270,000 in Dec. 2013 to $410,000 in Dec. 2018. That equates to a 34% increase over five years. This figure aligns very closely to that of the S&P, but there is obviously big differences between homes listed in Elbert County compared to those in the city of Denver.
The value of homes in Denver is determined by many factors including the neighborhood, comparable sales, home improvements, school district, etc., but also by strength of the economy, mortgage interest rates, business climate and the number of companies/people moving into the city. These factors along with supply and demand will dictate whether real estate prices rise or fall, and the return people will see on their investment.
Let’s get back to that initial investment. So let’s say you just received an $80,000 inheritance from your grandmother in 2013. You decided to invest in the stock market. From Dec. 2013 to Dec. 2015, the S&P 500 Index posts a 36% increase so you now have $108,800 in your portfolio.
Now let’s look at the same $80,000 and use it as your down payment on a $400,000 house in Denver. You get a loan for $320,000 at a 4.4% interest rate (Dec. 2013 average). By 2018, your house has increased in value by 34% (DMAR figure for a median home increase) and it’s now worth $536,000.
You decide to list your home and get the asking price of $536,000. Based on the NerdWallet amortization table, taking into account interest and principal paid, the remaining balance on your loan is $288,247, leaving you with a net of $247,753. Even if you subtract 6% for real estate commissions, you still clear well over $200K.
It’s important to note that these figures don’t include any improvements you may have made on the house which would have increased the value and most likely the asking price. It’s imperative to keep a file of all the upgrades you’ve made to your home and use them to your advantage when setting (and justifying) the listing price. Most buyers like to see some upgrades in the home (unless it’s brand new), and would gladly pay for those updates as part of the agreed-to price instead of paying for them post-sale.
Furthermore, the investment doesn’t reflect the tax advantages of owning a home, and the social and health benefits of home ownership. It’s also a great way of “forced savings” or building a nest egg or equity towards a bigger home down the road.
These figures also point to why people have decided to invest in real estate for passive income, whether as a rental property or acquiring a fix and flip. Using the NerdWallet calculator and the earlier example of a $400,000 Denver home purchased today with a 4% loan (with $80,000 down) would land you a mortgage of $1,968/month (includes taxes and insurance). According to Apartments.com, typical rent in Denver for a two bed, two bath house is well north of $2,000/month, allowing you to not only cover the mortgage but make money on the investment.
If you are considering buying a home as your primary residence or as an investment, please contact us to help you navigate the Denver real estate market. There are many opportunities in today’s market, and we’d love to make your dream a reality.