It is hard to think of a more widespread fallacy. Not only is home ownership not a great investment compared to the available alternatives, it is a lousy investment. Consider the following data.
As you can see from this chart, over the last 20 years national housing prices have lagged behind what an index fund based on the S&P 500 would have returned by a considerable amount. This is true even if you include markets in which housing prices grew faster than the national average (I included data for Washington D.C.). Surprisingly, the data is pretty much the same.
But, some will argue, this looks at a relatively short period of time. It fails to include the 1980s, when housing prices rose substantially. The problem with this line of argument is that over the long run the stock market rose even faster. Consider the data covering the post-war era.
Lastly, many will object pointing out quite rightly that home ownership serves two functions--that of an investment and as, well, a place to live. True, we must consider that returns from the stock market would have to purchase equivalent rental housing. Fair enough. However, we must also consider the associated costs with home ownership that do not apply to rental property. For example, a $500,000 home purchased with a 10% down payment will accrue over the life of a standard 30-year fixed mortgage at 6% slightly more than $1,000,000 in interest payments. Even with those payments being tax deductible, one still pays an extra $700,000 in interest over the life of the loan. Add to that approximately $300,000 in property taxes and insurance and $50,000 in repair and upkeep and we are now back to over $1,000,000 in extra costs over the life of the loan. That leaves a renter with $2,900 a month to pay for housing costs. Anywhere in the country outside of perhaps Manhattan $2,900 a month will cover a very nice and spacious rental property.
There may be all sorts of good reasons for home ownership. Seeking a good investment is not one of them.
I made a buttload on my house over the past 8 yrs and I'm using that equity to move to a much nicer house in Austin in a couple of months. Put that in your blog and smoke it.
ReplyDeleteHow big is your "buttload" once you subtract all the money you paid on interest, property taxes, insurance, and upkeep? Furthermore, how does the resulting aforementioned buttload compare to what you would have made had you simply invested in an index fund?
ReplyDeleteAccording to Case-Shiller data, the national median cost of a house from 2003-2011 increased only by 6.5%. Over the same period, the S&P 500 increased by 46%.
If you made a killing since 2003, then you just got lucky.
The majority of Americans who would be willing to pay a large sum to own a home would not be willing to make that large of an investment in an index fund. Mortgages are sort of 'forced' investing.
ReplyDelete