The biggest influence on our financial health isn't how much we save. Nor is it the funds we choose in our 401(k) plans. It is our ZIP code--- where we buy and own a house. Pick the right area and your future is golden. Pick the wrong area and you'll always be behind the folks who happened to buy in the right place. As you will soon see, no matter where you live, it is likely to be more important than your 401(k) plan.

I've suspected this for years simply because the most valuable asset most of us own is our home. Check the net worth of different households and you quickly learn that home ownership is more than important for most Americans. It's the whole ball game--- 70, 80, 90, or 100 percent of net worth.

One odd side effect is that people in some parts of the country are becoming much richer than people in other parts of the country not because of the work they do, the income they earn, or the investments they make--- but because of where they live. As one Boston economist remarked to me several years ago, "You know, I've made more money on my houses than I have ever made as an economist." (The economist had owned homes in Wellesley, a Boston suburb, Beacon Hill, and Washington D.C.)

You can see the impact by reading the most recent house price index report from the Office of Federal Housing Enterprise Oversight, better known as OFHEO. Unlike the median home price resale figures provided by the National Association of Realtors, the OFHEO figures are based on tracking the resale and refinance data of the same homes over time. As a consequence, its figures aren't affected by increasing home size and other factors--- they are a good indicator of what you'll experience in any given area. Every quarter the office provides index data for states and Metropolitan Statistical Areas for the preceding quarter, year, and five years. It also provides an index from 1980 to the present---24 years.

Over the five years ending December 31, 2004 the typical U.S. house has appreciated a whopping 49.67 percent. That's a compound annual appreciation rate of 8.4 percent, more than 3 times the 2.56 percent annualized rate of inflation over the period. For most people that gain more than offset any stock market losses suffered when the Internet bubble burst. You can get an idea of the bonanza this has been by measuring it in years of owner earned income. If the value of your home was equal to 3 years of your income five years ago and you owned an average U.S. home, your net worth has increased by about 1 ½ years of income.

Now ask yourself: How long would it take to accumulate 1  ½   years of income through savings?

If you save 6 percent of your income in a 401k plan, get a 50 percent employer match, and earn 9 percent on your investments, it would take nearly 10 years--- twice as long--- to accumulate 1  ½ years of income. Your 401(k) plan assets would all be taxable.   Home appreciation is tax-free. Adjust for a relatively low 15 percent tax rate and it would take nearly 12 years to accumulate the purchasing power an average homeowner may have gained in 5 years of home appreciation. In addition, you have to save actual money in a 401(k) plan, while your home appreciation is "free money." (The actual figures will depend on how much your house was worth relative to your income.)

Twelve years is a long time.

Over the last five years homes in California doubled in value, rising 102.35 percent. Comparable California homeowners saw their net worth rise by about 3 years of income. It would take nearly 15 years of saving in the same 40l(k) plan to accumulate the same amount of money, nearly 18 years after adjusting for taxes.

Texas homeowners, on the other hand, would have seen home appreciation of only 24.27 percent. That's better than inflation, but half the national average. It's also an increase of only 9 months of income. They could accumulate that much in about 6 years in a 401(k) plan, 7 after adjusting for taxes.   Believe it or not, eight states did worse than Texas--- North Carolina (23.63%), Ohio (23.18%), Alabama (22.86%), Mississippi (22.14%), Nebraska (22.05%), Tennessee (21.56%), Indiana (20.02%), and Utah (16.17%). (See table below for a representative sampling of states.)

You get a visceral idea of the power of home appreciation when you notice that only Utah homeowners, the worst state in the nation for this 5 year period, did slightly better in a 401(k) plan than with their home ownership.

Measuring the Investment Power of Home Ownership
These figures assume the original home price was equal to three years of earned income. The figure for years of 401(k) accumulation is rounded to the nearest whole year. The return on 401(k) investments is assumed to be 9 percent.
State 5 Year Appreciation of your home in percent Value of Appreciation measured in Years of Income How long it will take to accumulate the same amount in your 401(k) in years. (Tax adjusted years)
California 102.35 3.07 15 (17.6)
Florida    75.01 2.25 12 (14.1)
Minnesota    55.98 1.68 10 (11.8)
U.S. average    49.67 1.49 10 (11.8)
Washington    37.05 1.11    8 (   9.4)
Texas    24.27 0.73    6 (   7.1)
Utah    16.17 0.49    4 (   4.7)
Source:, author calculations

Does this have implications for financial planning?

You bet. If you're committed to living in a low appreciation state, you need to take your savings very seriously. If you happen to live in a state with a high appreciation rate, count your blessings--- and pray that your house will continue to be your biggest asset.


Office of Federal Housing Enterprise Oversight

Bureau of Labor Statistics CPI information and calculator