A researcher named Daniel R. Amerman, whose fascinating books I highly recommend, analyzed every home ownership period from 1975 to today. He looked at hypothetical ownership periods: two-year owners, three-year owners, all the way to 30-year owners.
He found homeowners, on average, doubled their initial investment (their “down payment”) in three years, tripled it in seven years, and quadrupled in ten years.
And only 4% of that came from appreciation.
The rest came from what he calls “The Eight Levels of Homeowner Wealth Multiplication.”
In short (go ahead and skim this), those are inflation, the compounding effect of that inflation, the bank's share of both of those, the mortgage paydown, the actual real increase in market value, the “bank's share” of that increase, the multiplicative effect of the inflation and appreciation (they work on each other), and the added kick of that effect on the bank's share.
Whew.
It's a whole book and there are dozens of graphs, but after number crunching all eight, Amerman’s main takeaway is that inflation (which is a wealth destroyer for most people) is the primary wind in the sails for home wealth.
And “my house went up in value” is a a mere 4%.
And the math of it all loves mortgage debt. It's an obvious point but worth repeating: home ownership is rare product that you can borrow money to buy (from the bank, in the form of a mortgage), but pocket the profit you make on the borrowed money.
Isn’t the bank a fantastic business partner? Puts up 80% of the starting funds, get 0% of the profits!
This is why you want to have mortgage debt.
You might ask, “What difference does it make if wealth comes from appreciation or inflation? We get equity anyway.”
Here's why: inflation is guaranteed, even in a flat market. It's the stated policy of the US government. Buying investments that gain massively from inflation is smart because you’re in business with the most enormous economic force on the planet, the US Federal Reserve.
