When a homeowner holds an amortizing mortgage, the monthly loan payments include principal pay-down as well as an interest payment. This principal portion of the loan increases with each loan payment made so that over several years homeowners can build up additional equity in the home. Further, the fact that home ownership involves predictable, steady monthly payments can be attractive to many people. Let's again consider the three components of the growth of the housing investment. First is the property value growth.
Most people look to purchase homes that appreciate over time.
However, property values tend to be based on conditions related to the local economy and therefore beyond the control of the homeowner. And measured as an investment, historical U.S. growth in property values has lagged long-term historical growth of stocks and bonds. The second component is the equity generated via principal pay-down. While the steady and predictable payment of the mortgage is attractive as a forced saving, there appear to be drawbacks. Principal growth can be relatively low in the initial years of loan payback unless additional principal payments can be made without penalty.