In this period of slowing or declining home price appreciation, many new and prospective homeowners want to know whether buying or owning a home now is a smart move.

PMI wanted to address this concern on a national and regional level so we looked at quarterly data for the 50 largest metropolitan statistical areas (MSAs) in the Office of Federal Housing Enterprise Oversight (OFHEO’s) House Price Index from 1975 through the first quarter of 2007. To calculate the return on equity, we assumed that the average homeowner made a 20 percent down payment. We then calculated the annualized rates of return on the initial equity investment at the 2-, 5-, 10- and 15-year marks.

The Big Picture
What we found was that, on a national level, owning a home for 10 years remained a good way to build wealth and increase net worth over the long term. Homeownership produced a positive return on investment 98.9 percent of the time. Over 15 years, that number increased to 99.9 percent. Individual rates of return varied across MSAs, but some common observations emerged from reviewing the data in its entirety.

Observation 1:
The risk of loss drops the longer one owns a home. With long-term ownership, the risk of loss is dispersed over a number of years, and the likelihood that one will receive a positive return increases.

Observation 2:
The variation around the expected rate of return on equity decreases the longer one owns a home.

The range of possible returns narrows as time passes, increasing the stability of the investment. The average annualized rate of return decreases slightly over time but never dips below zero, even in markets with high price volatility.

Observation 3:
If your goal is a predictable, positive return on your investment, the timing of a home purchase is less important than the length of time that you own your home.

The volatility around short-term investments is greater, meaning that the potential for both gain and loss is higher if you invest for the short term. The longer one holds the investment, the more stable the return will be. This result is found to be largely independent of when one purchases the property.

The Bottom Line
There are unique examples of extreme price declines. It remains unclear how today’s market will develop, but evidence shows that when buyers treat their homes as long-term investments, the long-term data shows definitively that homeownership is an excellent way to build wealth.