Estimating User Costs and Rates of Return for Single-Family Residential Real Estate

This paper discusses the costs of home ownership and their potential impact on real estate returns. The simulations show that user costs can easily exceed the total of capital gains and imputed or actual rents based upon historical long-term real estate mortgage interest and appreciation rates. To offset high user costs and potential lower rates of return on residential equity investments, the purchase price becomes critical. Furthermore, holding periods are important. If there is less than the average 7-year holding period, the higher relative transactions costs result in much higher user costs. In addition, the simulation analyses show that user costs play an important role in potentially explaining the above long-term average appreciation rates experienced from 2000 to 2005 in many residential real estate markets nationally.