Does Choosing a Big Home Make You Richer?
Through good times and bad, homes that are 4,000 square feet or larger have enjoyed greater growth rates in value than smaller homes, according to the latest figures from an FNC survey of residential home sales. With data going back to the year 2000, FNC concluded that although the gap between large-home appreciation and small-home appreciation narrowed during the worst years of the housing bust, large homes nevertheless kept their lead throughout the period. Over the long run, the 1-to-2-percentage-point gap means a lot of extra profits for owners of big homes.
Why Housing Prices Matter So Much
The biggest reason Americans have gotten so rich from their homes is that housing-related debt has essentially become a forced-saving system for many homeowners. By gradually paying off your mortgage and building equity in your home, you can effortlessly create a nest egg to tap later in life when your housing needs aren't as great.
Yet during the housing bust, many Americans found their net worth moving in the opposite direction. As home prices in many areas plunged, millions found themselves owing more than the current value of their homes.
Now, though, the housing market has largely recovered. The FNC survey found that the sales price of the typical American home has risen by 30 percent since 2011, climbing from $160,000 to $208,000 as of October 2014. Interestingly, though, FNC found that actual home values haven't risen nearly as much over that time frame, with its FNC Residential Price Index climbing 17 percent. That finding indicates that the rise in median sales prices reflects a change in the mix of homes being sold, with a greater number of higher-value homes on the market now than were up for sale three years ago.
In addition, as you'd expect, ordinary sales between willing buyers and sellers command much higher prices than sales related to foreclosure proceedings. Normal sales took place at about $120 per square foot, compared to just $73 per square foot on foreclosure sales. Foreclosed properties tended to be smaller and older than properties sold normally, and discounts to the home's estimated value tended to be much higher in foreclosure situations than in normal sales.
Even in foreclosure, large homes enjoyed a marked advantage compared to smaller homes. Foreclosed large homes that previously sold for more than $500,000 tended to carry just a 6 to 7 percent discount in foreclosure, compared to a much larger 17 to 19 percent discount for homes that previously sold for between $150,000 and $350,000. That disparity has stayed consistently wide since the financial crisis, with the spread between large homes and smaller homes climbing to as much as 15 percentage points in recent years.
Perhaps most important, the real-estate market has become less of a haven for house-flippers. Home turnover has decreased markedly, with relatively few homes being held for short periods of time. That suggests that more homeowners are looking at their homes as a long-term investment rather than a short-term source of cash. That bodes well for the recovery, supporting the idea that the rise in prices thus far hasn't pushed the real-estate market into bubble territory.
The Most Important Takeaway From Home-Price History
Although it's tempting to fixate on the differences between how prices of large homes have performed compared to those of small homes, the most important information from the FNC report is that in extremely broad terms, the housing market continues to generate gains across the board. For those homeowners who managed to make it through the financial crisis, that's unquestionably good news -- and something that should help your net worth in the future no matter what size of home you happen to own.
Rising home prices are always nice for homeowners. But in the long run, building equity in your home by paying off your mortgage will be the more important contributor to your financial health, and as long as real-estate market conditions remain favorable, you'll be able to use that home equity to help finance your retirement in the future.
Motley Fool contributorDan Caplingerhas a house that's sized just right. You can follow him on Twitter@DanCaplingeror onGoogle+. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.