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Thursday, February 18, 1999

The House Jackpot

by jludwig@san.rr.com

A woman in our local area exclaimed about the wonderful fortune her family got last year as they sold their home at the perfect time. We live in San Diego, where home prices are very high, and she was delighted. As the economy has gotten rolling again, in the last four years, housing prices have gone up quite a bit.

"We sold our house for DOUBLE what we bought it for 14 years ago!" the lady exclaimed. She was very satisfied with her decision to sell a house, and I assume, the decision to buy the house 14 years ago. Doubling your money is a worthy pursuit of any true blue American! Anybody would be happy with a return like that!

Wait, I wondered. How much is that, really? I know it's not really 100% a year, because that would be 1 year, not 14. Does it even come close to an index fund (11%), bond fund (5.5%?), money market fund (4%?). I pulled out my handy dandy spreadsheet to find out. I wanted my result to be double my starting amount after 14 years.

What I came up with was a real rate of return of just under 5.08%. Not bad! And you get to live in the house! And you didn't have to pay for the whole thing. (But you do have to pay real estate fees, and mortgage interest, and property taxes.)

There is no way that it even comes close to the 11% return of an S&P 500 index fund. That would have doubled your money in about 7 years (past performance is no indication of future results!).

My advice: buy/rent something you can live in well within your means. For investments, stick to investment vehicles. Houses make pretty lousy ones, mostly.


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