Granted that the above statement implies a fantastic gain over 50 years, there are some other things to take into account. For example, there are numerous mutual funds in which, had $10,000 been invested 50 years ago, with all dividends reinvested, the principal amount would be over $4,000,000. With the mutual fund, the problems of maintenance, insurance, and real estate taxes would not have been present. Of course, the person with the mutual fund would have to rent somewhere, so that factor must also be considered. And, there are some funds that have gone belly-up. Life is, in many ways, a game of chance.
What needs to be examined is the problem of depreciation of real estate. Most folks realize that when they drive a new car off the lot, it will immediately depreciate, at the very least by the amount of the salesman's commission. They do not consider that the same thing can happen to a new home in a tract home development. They also appear blithely unaware that any house, in any place, suffers depreciation by virtue of growing old and having parts wear out.
Think of the roof. Most asphalt shingle roofs have 20 - 35 year warranties. The typical roof needs to be reshingled after about 25 years. That means if you are buying a house today which was re-roofed in 1987, the shingles are about 80% depreciated, and you can expect to be putting on a new roof in 2012. That new roof in 2012 (depending on the price of oil by then) may cost you $10,000 to install. If you have a choice between this house, and one that was just re-roofed, how much will you depreciate your offer to account for the older roof? If you decrease your offer by $8,000, can you be reasonably sure that in 5 years you will have $10,000 to spend to re-roof your home?
Furnaces last for about 25 years, wood siding needs to be repainted about every 5 - 10 years, aluminum siding needs to be repainted about every 25 - 30 years, and despite being advertised as "no maintenance", vinyl siding will probably last only about 50 years before it needs to be replaced. Even brick requires that the joints be cleaned out and regrouted every 50 - 100 years, depending on the type of mortar used, and that is an expensive operation.
Then there is the carpet and the vinyl flooring, the cabinetry and countertops (think : modernize), and even windows and doors. If you were to build a new house, and let it sit with no maintenance, it would probably not be livable after about 70 years; it would have reached the end of its economic life.
If you ask any building products salesman about the benefits of fixing up your home, he is likely to assure you that you will get your money back by doing any needed repairs. The National Association of Realtors does an annual study of the return on the cost of home improvements, and it can be a real eye-opener. The following are rounded percentages of return on dollars spent for some specific home projects in this (NE Ohio) region:
| Project | Return on Cost |
| Deck | 65% |
| Remodel Bath | 60% |
| Remodel Kitchen | 55% |
| Replace Roofing | 60% |
| Vinyl Residing | 80% |
On the other hand, if you do not maintain the home, and hope to sell it, it must compete with average homes as well as updated homes. The updated homes will have increases in value, due to their upgrades, over the average homes, but the buyer of a home that needs a good deal of repair work is going to compare the fixer-upper to an average home and deduct the full cost of making the repairs from any offer. If the homeowner does the repair work himself (assuming he has the skill to do a decent job of it), or subcontracts the work himself, he may be able to recover his actual costs in the sale.
In most market value appraisal reports there is a section which is given to estimating the value of the home using the Cost Approach. Appraisers have concerns with this, because lenders sometimes like to try to obtain an insurable value from those figures. That is an inappropriate use for the Cost Approach, since the Cost Approach must include depreciation in order to reflect the realities of the marketplace. The easiest form of depreciation to estimate is Functional Depreciation, which takes into account the age of the components of the home. Tables are available, or the depreciation can be taken as straight-line depreciation based on the estimated Effective Age of the subject, and the estimated Remaining Economic Life (both of which are subjective and could depend on whether or not the appraiser was looking into the sun or failed to clean his glasses, or if the homeowner painted over the foundation cracks and pushed furniture against the wall to hide the broken plaster). Economic Depreciation (tied to such things as the job market in a community and interest rates) and External Depreciation (which is concerned with changes in zoning, toxic waste dumps, adjacent railroad tracks, or criminal activity) is much more difficult to measure. As a result, the Cost Approach is usually not considered reliable for homes that are more than two or three years old. It can, however, provide some warning if it (a) has been done with due diligence and (b) it varies more than about 10% from the value derived by comparing actual sales.
It is this appraiser's belief that the key to providing a reliable Cost Approach indication of value is the use of the site value. Site values are determined ideally by comparing sales of other vacant building sites in the same general location. They may also be extracted from sales data by backing out the depreciated value of the improvements. In both cases, it is logical to believe that the site value will probably reflect both the Economic and External Depreciation; that is, those factors would be built-in to the cost a buyer would be willing to pay to acquire a raw building site. Thus, if a realistic site value is available for the subject, the Cost Approach can be performed without too much concern over Economic and External Depreciation and still be considered reliable as an indicator of market value (but not insurable value!).
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