"Buy the best house you can afford" (Follow up to 'My House is an Investment' post)

Those were the words a realtor used to persuade one couple to purchase a slightly larger home than they needed. The thought was that homes always perform well as an investment so you can't lose. Well, its now obvious that was faulty logic. A recent post on this blog suggested that houses are exceedingly poor investments, returning an average of -1.4% after inflation.

While this remains true, it should be noted that rented over the same 30 years is possibly an even poorer decision. Let's revisit that couple who purchased their 155,000 home on a 30 year fixed rate of 4.875%. Remember they paid, a total of $400,000 on a house that would be worth $275,000 when they finish paying it off. Obviously, with such a terrible rate of return, the above realtor's financial advice is equally terrible (I try to make money on my investments).

However, (this is the caveat many of you have been waiting for) purchasing the least expensive home that you will be happy with for 10+ years isn't a bad financial decision. Even if you lost $125,000 on the above home, it's still better than the loss you'd take on renting an $800 home over the same time period. $800/mo x 30 years = a $288,000 loss.

The lesson in all this remains to be that homes are poor investments. If you know you'll be staying in the area, buy an inexpensive and small one to minimize your losses. If you don't want to live in an inexpensive and small home, look at it the same way you look at buying clothes or a computer and call it a discretionary, fun(!) purchase not an investment.